It’s no secret to anyone who has watched the Arizona real-estate market over the past year that the number of homes for sale has dropped sharply.

What many don’t understand is why this sharp decline is taking place. The answer is two-fold.

This first reason for the housing shortage is the big price declines that are keeping many home sellers on the sidelines. The supply of homes for sale has declined as the rate of homes with negative equity has increased — or the share of borrowers who owe more than their homes are worth — rises.

Across the U.S. markets where more than half of all borrowers were underwater had enough inventory to last 4.7 months at the current rate of sales in April, below the national average of 6.5 months. Meanwhile, markets where fewer than 10% of borrowers were underwater had 8.3 months of supply.

The presence of negative equity not only drives foreclosures, reduces the availability of purchase down payments and impedes refinances, but also restricts the ability of owners to list their homes for sale even as the demand side of the market improves.

This helps explain not only big inventory drops in Arizona, but it also sheds light on why prices are rising at the bottom end of the market. Negative equity is more pervasive at the low end, which suffered bigger price declines, and so the supply is also tighter.

This “can’t sell” cohort of homeowners isn’t the only reason inventory is low.

Arizona has seen an influx of well-funded investors scooping up foreclosures that can be rented out, meaning inventory is being taken off the market, at least for now.
Meanwhile, banks have sharply slowed down their foreclosure processes after being caught fraudulently processing the paperwork required to take back those properties two years ago.

And even homeowners with equity may be unwilling to sell at today’s lower prices. This is particularly true of borrowers with less than 10% home equity, who may be depending on that cash to pay their real-estate agent and to fund a down payment and closing costs for their next home purchase.



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