Why Sellers Hold Back:
- Family Matters: Families who want to move may have their money tied up in the equity of their current house. In the past, there were lots of lenders who would give them short term “bridge” loans. Bridge loans allowed the family to buy a new home, move out, and then sell the original house. Some bridge loans still exist, with tighter restrictions: the homeowner must qualify to pay the mortgage on both homes. In the past, some rental income value was attributed to the old house which helped with the income qualifications. Now those options are gone for many. What this means is that these homeowners must decide to sell their home first, without having a home to move into. The family then rents while they look for a new home with the liquidated equity from their first home. This is harder on families because often it feels too difficult to risk moving their children twice, particularly if the moves may put them in and out of different school districts.
- Less Equity: Many homeowners have lost equity because of market decline over the past several years. If these homeowners don’t have a compelling reason to move, it is unlikely they will choose to sell at a loss. Many of these homeowners prefer to hang tight until the market improves and they gain back some equity.
- Decreased Ability to Borrow: Buyers who may have expected to move up the property ladder by now feel stuck when they find out they qualify for fewer loans. Many buyers qualify for less money because they have lost jobs or elected to take pay cuts to keep their current job. Other homeowners got into their current homes with sub-prime mortgages. Those options are gone, and therefore that ability to leverage a property is gone too. Lenders have also tightened up the qualification process. Even after several years of good behavior, making every payment on their existing mortgage, some borrowers are still qualifying for less now than they could seven years ago. This hurts homeowners who want to move up and those who simply want to take advantage of the current low rates. They may want to refinance, which would reduce their monthly payment. Yet, they can’t qualify for the same mortgage loan amount with a lower payment.
Why Banks Hold Back:
Many economists are concerned about “shadow inventory.” Shadow inventory is the inventory that banks are holding back from the market. Banks hold back for a number of reasons:
- Market Depreciation: Banks are concerned that if the foreclosed inventory hit en masse it would depreciate the market and make all their real estate holdings worth less.
- Bookkeeping and Timing: It can be worthwhile for a bank to delay foreclosure in order to retain the positive asset of an existing loan, rather than reporting the loss to their investors.
- Government Incentives: Big banks delaying foreclosure can still qualify for incentives from the federal government for continuing to “help” homeowners in distress. According to Nick Timiraos of the Wall Street Journal, "banks owned about 450,000 properties at the end of March, but there were an additional two million loans in some stage of foreclosure and around 1.7 million more where mortgage payments hadn't been made in more than 90 days."