Last year investors bought one out of every five home sales in the U.S., according to the National Association of Realtors, but with rising home prices and fewer distressed properties, that percentage is likely to fall significantly this year. In fact, institutional investment firm Blackstone Group LP reported in March that it has decreased its pace of home purchases by 70 percent since last year because of the drop in foreclosures. "I'm sure other institutional investors also pulled back for the same reasons," says Walt Molony, a spokesman for the National Association of Realtors. "Buying investment property has gone from being a no-brainer to having to do traditional research and analysis." The question now becomes: will there be enough regular homebuyers in 2014 to fill the vacuum and keep the housing recovery going?
The heart of the problem for traditional buyers is the same reason so many investors are pulling back on house purchases - there are not enough sellers, creating limited inventory and much higher prices. In terms of inventory, the number of homes for sales has fallen to a five-month supply on the market, down from about a six-month supply in 2012 and an eight-month supply in 2011. The last time the U.S. market saw such a low level of inventory was back at the peak of the housing boom in 2006 when almost every home saw a bidding war and many were sold within the first listing day. Some markets are now seeing a slightly milder version of that same real estate chaos.
So why haven't sellers come out to meet demand? Even though home prices in many parts of the nation have seen double-digit percentage increases during the past year, 19 percent of homeowners are still underwater on their mortgages - they owe more on their loans than their homes are worth - making it almost impossible for them to sell. And online real estate data company Zillow estimates there is another 37 percent of homeowners who do not yet have enough equity to make selling worthwhile. All together that means more than half the homeowners in the country are currently unable or unlikely to sell.
And with far fewer foreclosures and short sales and other homes in the lower price ranges coming on the market, it's an especially difficult situation for first-time home buyers. "The double-digit jump in prices over the past year means prices don't look as low relative to rents as they did a year ago," said Jed Kolko, chief economist for real-estate firm Trulia. "Rising prices and mortgage rates also hurt affordability for first-time home buyers."
So if half the nation's homeowners can't sell and many of the country's would-be first-time homeowners can't buy, what will happen to the housing market in 2014? Some experts believe that home sales will fall by 100,000 units compared with 2013 even though prices may continue to rise. Eventually the gain in prices - hopefully combined with a stronger jobs market - will push more homeowners into positive equity and allow supply to balance out demand. Unfortunately, it is possible that process may take the better part of the year.