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Why there’s a lack of homes for sale

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In many once-distressed housing markets, home sale prices are rising by double-digit percentages, and homes are selling much faster than in recent years, often with multiple offers. Mortgage rates are extremely cheap. But before we strike up the band, you guessed it, there's a catch.

There aren't enough homes available to satisfy demand.

In these now-thriving markets, severe inventory constraints are causing consternation for buyers, Realtors and the mortgage industry. Why are so many potential sellers sitting on the sidelines?

In November, Redfin, a real-estate brokerage, predicted that sellers would gain confidence leading to “an easing of the big inventory squeeze that has made headlines throughout 2012.” To Redfin's credit, this month, it concedes that this hasn't happened. According to Redfin data, in cities such as Atlanta, Ga., there were 42% fewer new listings on the market in the first two weeks of 2013 than there were in 2012. Seattle saw a 23% dip; Los Angeles dropped by 36% and Denver fell by 35%.

(Data: Redfin)

In many markets, a substantial number of homeowners remain underwater and are waiting to break even before getting out. According to CoreLogic, 1 in 5 homeowners with a mortgage owe more on their home than it is worth, which would obviously encourage them to wait for home prices to recover. And of course many homeowners have taken advantage of low interest rates to refinance their mortgage, which may give them pause about selling.

A Wall Street Journal blog post on this topic points out that many homeowners lack the equity to buy a bigger home than the one they currently own. The Journal also points out that builders are developing fewer homes because of what had been saturation in markets such as Phoenix, Arizona.

But Jed Kolko, Trulia's chief economist, dismisses the underwater homeowner theory. "If people are choosing not to sell their home because they're underwater, we should have seen an increase in inventory, because with rising prices fewer people are underwater than there were a year ago," he says.

Instead, Kolko posits three reasons why housing inventory is lower now:

• Fewer distressed or foreclosed properties are on the market, particularly in states with a "faster, nonjudicial foreclosure process."

• While housing starts are rising, "construction is still at a very low level, and many of those starts haven't been completed yet."

• Patience may be rewarded. "Many people who would want to sell would rather wait until prices are higher than they are today so they can get more from their home."

Redfin CEO Glenn Kelman says that while there are many reasons to hold off on listing a home for sale, there are advantages to diving in now. "As long as your home is reasonably priced, you'll sell it quickly, and that's the allure of listing it now," he says, adding that 1 in 4 sell in less than two weeks.

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