“If there are so many more buyers and so many fewer homes for sale, why aren’t home prices going up?”
Such was the paraphrased question that arose during a Friday night real estate continuing education class nestled inside happy hour at Rock Bottom. (Okay, so it wasn’t a real class but I’ve learned more with a beer in my hand than anywhere else since I first entered the business.)
On the surface, the question seems to be a completely logical attempt to determine why logic – in this case, the law of supply and demand – hasn’t applied to the Phoenix real estate market. Yes, there are places in the Valley of the Sun where prices have started to rise but those have been the exception and not the rule.
Except they ought to be the rule in an environment where an astronomical 8,397 single family detached homes closed escrow in June according to the Arizona Regional MLS and only 14,187 such homes are currently listed for sale.
At the current sales pace that means we have less than 2 months of inventory left on the market. And, yet, prices aren’t moving. Why? The answer could be in your local poker room …
If you’ve ever played poker, more chips equals more power. The larger your stack the more easily you can bully those with substantially smaller stacks. Put another way, a very thin amount of supply will cause someone to act differently than they will with a large amount of supply.
Normally, when someone poor shlub is down to their last handful of chips, you can be the aggressor and enforce your will upon them. Think of the person holding the chips as the seller and the person on the short stack as the buyer. Fewer homes for sale, sellers have the leverage and can drive prices up.
Here’s the problem. While the idea of shadow inventory is sketchy at best, it does exist in one form or another. There’s no question that banks are not putting homes on the market as quickly as they foreclose upon them; the only real question is how many homes are on the sidelines waiting to be listed.
(Brief aside for the lenders out there – this would be one hell of a time to release the flood gates, should there be a flood waiting – at least to bring the market to a more healthy three or so months of inventory. But hey, what do I know?)
Bullying someone off a short stack of chips doesn’t work when they can reach into their pocket for a couple of Benjamins and stay in the game. You’re looking at what you believe to be their supply – the chips on the table – while they are behaving in a manner based on the knowledge that there’s more supply you can’t see.
Buyers know there are going to be more homes for sale, homes that the banks will price somewhat aggressively to sell as quickly as possible. Whether the exact home they want is waiting in the shadows isn’t certain. Whether they’ll be able to survive a bidding war to get the house they want definitely is in doubt.
But there’s little doubt in most buyers’ minds that there are more homes out there.
Because of this knowledge, this perception of a supply that isn’t appearing to the naked eye, buyers aren’t necessarily willing to climb over each other to purchase a house. Yes, we have multiple-offer situations on many, many homes now. But no, we don’t have insane circumstances like 2005 when buyers are waiving appraisals and writing escalation clauses promising to pay $10,000 more than anyone else offers.
(Those, incidentally, were pretty dumb ideas back in the day; amazingly, I’ve had more than one buyer suggest adding such a clause within the last six months.)
Yes, the law of supply and demand is an economic law. But it’s also based on a certain set of assumptions, assumptions that at least at the moment in the Phoenix real estate market, simply don’t exist.