Lack of Distressed Supply Pushes Home Sales Lower

Sales of existing homes continue to drop, and while tough credit and weak consumer confidence are certainly factors, lack of supply appears to be the latest culprit.

Phillip Spears | Digital Vision | Getty Images

Inventories of existing homes historically rise in the spring, as sellers look to take advantage of the busy season; not so this spring.

Inventories fell 1.3 percent to 2.37 million units for sale. That's down nearly 22 percent from a year ago. Inventory is dropping because the number of distressed properties for sale is dropping.

The data speak volumes: Distressed sales fell to 29 percent of all sales in March, down from 34 percent the previous month. The investor share of sales also fell from 23 percent to 231 percent. That pushed overall home sales down, but most notably out West, where most of the distressed supply exists.

Sales fell 7.4 percent month to month out West in March, as supplies of existing homes fell to 3.1 months from 4.7 months a year ago, according to internal tracking by the National Association of Realtors. That is the lowest supply of any region by far, and half the national average. Compare it to an 11.6 month supply in the Northeast, where there are far fewer foreclosures.

Supply is tight because banks, after the 25 billion dollar mortgage settlement over so-called "robo-signing" have slowed much of the foreclosure process, trying to modify more loans or find foreclosure alternatives. We predicted this earlier.

Less supply usually means rising prices, if you go by the usual supply/demand theory. The trouble is, supply isn't dropping because of so much demand, it's dropping because of the distressed market.

Normal sellers still aren't putting their homes on the market for fear of deep price cuts, or because they are so underwater they can't afford it. More than 11 million borrowers currently owe more on their mortgages than their homes are currently worth.

On the demand side, credit is still very tight and fees for FHA loans, which had really been fueling much of the market, rose April 1st. We saw a huge drop in mortgage applications last week, driven by a 23 percent drop in FHA applications.

"This drop follows big increases in the demand for FHA loans over several weeks in anticipation of the FHA mortgage insurance premium increases that went into effect last week," wrote Mortgage Bankers Association chief economist Jay Brinkmann in a release. "This was the largest weekly drop in the government purchase index since the expiration of the first-time homebuyer tax credit in May 2010."

Without a strong recovery in the job market, which does not appear to be the case, and a big loosening in credit, which also does not appear to be the case, regular demand for home purchases will remain soft.

The potential demand among investors is strong and growing, but they need supply to buy, and they're just not finding enough.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick