US housing recovery is facing an obstacle: Not enough homes are for sale

GRAND RAPIDS, Mich. - Beth Heinen Bell and her husband, Christian, are sick of renting.

They want more space. They'd like to host friends for dinner. And now, having seen the real estate market start to rebound, they want to turn housing payments into long-term equity.

So after a decade as someone else's tenant, the Bells, like a rising number of Americans, are finally ready to buy a home. Yet they're running into an obstacle that's keeping the national housing recovery in check: There aren't enough homes for sale.

The housing shortage around Grand Rapids, Mich., a city known for its furniture industry and sleek downtown hospital complex, is fairly typical of what the country as a whole is facing this spring.

Some markets along the East and West coasts have grown red-hot. A handful of other cities remain depressed nearly four years after the Great Recession ended. But many more places are like Grand Rapids — a metro area of roughly 1 million that is strengthening slowly but steadily.

Like so many others, this Midwestern city 150 miles west of Detroit never experienced either the buyer frenzy or the price collapse that marked the boom and bust. Yet it, too, was affected. Prices fell. Homeowners lost equity. And now, many remain unable or unwilling to sell.

The shortage of homes is occurring just as ordinary Americans want to buy again. More of them feel confident about their job and retirement account. Mortgage rates are near historic lows. And prices are rising again, easing fears that new buyers might lose their investment in a home.

A tight supply isn't the only factor slowing what is otherwise shaping up as the strongest spring buying season since the housing boom ended nearly seven years ago. Some Americans have grown to prefer renting. Others who would like to buy lack strong enough credit or a large enough down payment to meet the stricter standards banks now impose.

Part of the reason for the supply problem is that when the housing market collapsed in 2006, many people lost so much equity in their home that they were unable or unwilling to sell. Prices have started to rise, but not enough to restore what many lost. Some still owe more on their mortgage than their home is worth.

Even many who have enough equity to sell want to wait for further price increases.

"Every buyer wants to buy at the bottom, but no seller wants to sell at the bottom," says Stan Humphries, chief economist at real estate information site Zillow. "They've got this hypothetical price that they think the house is worth at the peak, and they don't want to sell below that."

Others don't want to leave. During the depths of the recession, they chose to renovate their house instead of finding a new one. After paying for renovations, they now feel more invested and comfortable in their home.

Just a few years ago, the housing market was facing an oversupply of homes, one that eventually led prices to collapse. The bubble — and the bust — were worst in areas like Arizona, South Florida, Southern California and Las Vegas where developments kept popping up on vast tracts surrounding cities.

Banks offered absurdly low teaser rates to new homeowners who often bought with no money down. When their loan rates climbed after the introductory period, many were left unable to pay. Banks foreclosed, home values fell and those homes ended up being sold for a fraction of their cost.

In the past two years, hedge funds, banks and other investors entered those markets and helped soak up the supply and lift prices. Now, the country is facing a shortage of homes for sale.

In a few especially hot areas, such as around San Francisco and Seattle, some of the same kinds of bidding wars that inflated the housing bubble are back. Crowds of buyers are creating traffic jams outside open houses.

"People have been wanting to move for a very long time," says Glenn Kelman, CEO of online real estate broker Redfin. "Somebody rang a bell and said the boom is back, and nobody wants to be late to the party."

The Bells recently toured a 142-year-old home. Calling it a "fixer-up project" would be generous. Floors drooped. Doorways tilted. The master bathroom had a comically low ceiling. The only thing working in the living room was a mouse trap.

It was the only affordable house for sale in the small historic Heritage Hill neighborhood the Bells love. Within walking distance are shops and a church converted to a brewery. Restaurants are packed on weeknights with young professionals snacking on bacon cheddar meatballs, polenta fries and chicken fried livers.

The only thing harder than finding a seat at the bar during happy hour is finding a home for sale nearby.

Nationally, there were just 1.93 million homes on the market in March, down 16.8 percent from the prior year, according to the National Association of Realtors. In a healthy market, there's roughly a six month supply. This March, that number had fallen to 4.7 months — a situation stacked against buyers.

As more would-be buyers bid on fewer properties, prices are being forced up at a rate that might be overstating the market's health. Prices in the top 20 cities have risen 9.3 percent in the past year, according to the S&P/Case-Shiller home price index. That's the fastest year-over-year increase since May 2006.

The tight supply is a key reason that Susan Wachter, a real estate and finance professor at the University of Pennsylvania's Wharton School, estimates a full recovery is still three to five years away. Even so, Wachter calls this "a breakout spring." The public now recognizes, she says, that the housing recovery will last.

The Bells have already lost out on one house they liked.

"We wanted a day to think about it," says Beth Heinen Bell, 32, a communications coordinator for a writing festival. "We left the house, and our agent got a call that there was an offer in."

Diane Griffin, CEO of Griffin Properties, which has been helping the Bells search for a home, says a major problem is that many potential sellers aren't being realistic about price. She often has to explain that their property isn't worth what it was during the boom.

"This is the most difficult conversation I have with people," she says. "I have it multiple times a day."

Maureen and Bruce Hart are one of those couples who aren't ready to sell.

They've been in their house in East Grand Rapids since July 1990. Their two grown kids have moved out. Moving into a smaller home — with a smaller mortgage — makes sense. Yet the couple just spent more than $100,000 on renovations. There's a new kitchen, new roof, new bathroom, new windows and the addition of a porch.

"We really thought we were going to stay," says Maureen Hart. Then a house down the road sold for nearly half a million dollars. "That was a real eye-opener."

A real estate agent suggested listing the home, in a suburban neighborhood with packs of after-work joggers and cyclists, for $393,000. The Harts feel it's a good price. Still, they hesitate because they wouldn't recoup the money they spent on renovations.

Their other hesitation, Maureen Hart says, is that "we haven't really found anything we would be comfortable moving into."

Some relief will also eventually come from faster construction. Builders broke ground on homes in March at the highest annual rate since June 2008. But construction firms aren't yet ready to return to the even greater levels of building needed to fill the housing shortage. They're worried about rising costs for materials and labor. And many have had trouble finding skilled workers.

The overall pace of homes under construction rose to a seasonally adjusted annual rate of 1.04 million in March, the Commerce Department reported. March's pace was nearly 46 percent higher than in the same month in 2012.

Analysts say prices and sales still need to climb further before builders ramp up construction. The prices that new homes are selling for still don't match the cost of construction.

For now, that leaves would-be buyers with few options. Agents urge their clients to act fast, knowing how fierce the competition is. But often, it's not quick enough.

Grand Rapids real estate agent Michelle Gordon says that on Monday mornings, she typically gets a list from her clients of six or seven homes they want to tour that Saturday.

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