October 8, 2013

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Article

The Home Stretch

Homebuyers and Investors are Competing for a Dwindling Housing Supply

By Gaylen Webb

October 8, 2013


Utah’s residential real estate industry has pulled back from the brink. Most indicators are positive, with the number of sales and median home values on the rise.

But there is still one fly in the ointment—low inventory levels.

Salt Lake County, for example, currently has a 3.9-month inventory of homes for sale, creating a very difficult market for buyers. “In some situations it is really competitive, and if you aren’t the first or second person there, you may not get the house,” says Ryan Kirkham, principal broker for Kirkham Real Estate and vice president of the Utah Association of Realtors.

Anything below a six-month inventory is essentially a seller’s market.

“If we stopped putting any homes on the market right now, it would take five months to go through all inventories in the state, based upon buying patterns,” explains Cal Musselman, president of the Utah Association of Realtors.

In this environment, buyers have less negotiating power; and with interest rates and home values trending upward, time is not on their side.

Looking to Buy

But housing is still highly affordable for buyers. Indeed, the market truly has paused at a moment of balance for buyers and sellers.

“During this past year, we saw the highest affordability on record going back to 2000,” says Musselman. “And interest rates have only ticked up less than 1 percentage point (78 basis points) since last year, causing only a slight decrease in affordability since that record. The current market is actually in the rarest of rare moments when it is both an excellent time to buy and an excellent time to sell.”

During the recession and recovery, people couldn’t afford to put their houses on the market—either they were upside down or they were uncomfortable with their property values, he says. Today, values have increased enough for sellers to feel comfortable about putting their homes on the market.

In fact, Utah home values have increased for 14 consecutive months, according to Musselman. Homes in Wasatch, Iron and Washington counties experienced the greatest increases in value, with median prices up 32 percent, 24 percent and 20 percent, respectively.

“I suspect there will be more houses put on the market as values increase,” Musselman says, “but fence-sitting buyers have finally come into the market in a big way, and they are gobbling up inventory.”

The Salt Lake market has been “especially crazy,” says Kirkham. He is experiencing a sense of urgency from buyers right now as values rise and interest rates tick up.

Although interest rates are on the rise, Musselman says they are still “fantastic.”

“Buyers hit it out of the park with those crazy 3.25 and 3.5 percent interest rates, but anything under 4.5 percent is still extremely low and makes house hunting super affordable,” he says.

Meanwhile, the typical house is now on the market for 57 days, down 20 days from the average 77 days last year.

The most competitive markets in terms of month’s supply of inventory in June were Washington, Salt Lake, Utah and Davis counties. “St. George had a huge amount of investors and cash buyers come into the market,” Musselman says. “When you have cash, you can buy up properties really fast.”

Tightening the Supply

Investors are among several factors that are continuing to hold down inventory levels.

Investors are entering the market again, along with some “flippers”—buyers who want to profit from a quick sale and move on. But Musselman says flippers don’t drag down inventory levels because they generally buy a property, fix it up and put it back on the market. Investors, on the other hand, buy homes for longer investments, either to rent or sell years down the road. The surge in investors has helped exacerbate an inventory problem that isn’t likely to go away soon.

A reduction in the volume of foreclosures is another factor. Foreclosures have been a huge part of the market for the past three years, but Musselman says the torrent of foreclosures has slowed to a trickle. Limited new construction is also putting pressure on inventory. Contractors are building pre-sold homes “like crazy,” but they’re not building spec homes due to stringent lending requirements.

On the buyer’s side, lending requirements are loosening again, making it slightly easier to get a loan. Musselman notes that during the housing bubble, anybody who could fog a mirror could get a loan. “Yes, lending requirements tightened to an extreme level, but they have loosened some lately—loosened with extreme caution and thoughtfulness.”

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