Housing inventory was down again in September, and both lagging distressed sales and negative equity mortgages are to blame.

By Peter Ricci

For the most part, the September existing-home sales report from the National Association of Realtors (NAR) was positive. Sales were up by 11 percent from last year, median time on the market is down and distressed property sales continue to make up a fleeting share of total home sales. But still, sales were down 1.7 percent from August, and NAR had an able culprit to blame – shrinking housing inventory, which it claims is limiting sales.

Honey, I Shrunk The Housing Inventory

Total housing inventory, according to the latest NAR numbers, was down 3.3 percent from August to September and 20.0 percent from September 2011, and as CNBC’s Diana Olick recently wrote, a number of factors have contributed to that decline:

• First, there have been less distressed sales in recent months because distressed housing inventory has declined (distressed sales averaged a third of home sales in 2010 and 2011, but were 24 percent in September).
• That may seem strange, given that, according to LPS Applied Analytics, 5.45 million homes are still distressed; as Olick noted, though, banks have been much more aggressive on the loan modification front, with Bank of America alone reducing the principal on 30,000 loans from May to September.
• Also, tighter lending standards, which the Fed recently called out, have played a role. Though builders are responding to the tighter housing inventory by ramping up single-family home construction, first-time homebuyers, who traditionally make up 45 percent of the market, currently make up just 32 percent on account of those lending standards.

The Negative Equity Mortgage Shuffle

The number one reason behind the lower housing inventory, though, is negative equity mortgages, a point that Redfin has made time and again with its Real-Time Home Seller surveys. Thirty-one percent of homes with a mortgage, or 15 million homeowners, are in negative equity, according to Zillow, and considering that home prices have now bottomed and are beginning to rise, more and more homeowners are opting to wait for returns on their investments, rather than sell at a loss or break even.

So what does all this mean, exactly? That we should keep a close eye on home prices, as they’ll play a big role in active housing inventory in the coming months.