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Lack of Local Inventory May be Causing Home Sales to Decline

Lack of Inventory May be Causing Home Sales to Decline

An increase in buyers should be the solution to a struggling real estate market. But when the number of buyers exceeds the number of homes available for sale, market growth is constricted. Research conducted by the National Association of Realtors shows fewer buyers are signing real estate contracts; could a lack of inventory be to blame?

The Pending Home Sales Index, a measurement of the number of signed real estate contracts on existing homes, saw its fourteenth consecutive month of year-over-year gains in June. However, the index fell to 99.3, down 1.4 percent from May's index of a downwardly revised 100.7. On a positive note, the current index level is 9.5 percent higher than the June 2011 recorded level of 90.7.

The decline is caused in part by inventory shortages. The Pending Home Sales Index represents contract signings; buyers can only sign contracts when there are homes available for purchase in their price ranges. Buyers are eager to enter the housing market, but a lack of supply is thwarting their efforts.

The Realtor's Confidence Index measures the difference between the number of buyers and sellers active in the housing market. An index value of 50 represents neutral market conditions; the number of buyers is equal to the number of sellers. The greater the difference between the two values, the more unbalanced the market. In June, the seller index was 41, while the buyer traffic index stood at 60; buyers outnumber sellers, leading to a lack of inventory. The divide in the Realtor's Confidence Index is due in part to two types of active buyers―first-time buyers and investors. Both groups are targeting properties in the lower price ranges, leading to a shortage of affordably-priced homes.

Economists with the National Association of Realtors believe that banks hold the power to ease supply woes. By releasing bank-owned properties onto the market, banks will increase the housing supply, bringing the number of buyers and sellers into balance. That balance is the real solution to a struggling real estate market.