by Calculated Risk on 6/10/2012 01:15:00 PM

Another story on the sharp decline in home inventory ...

From Alejandro Lazo at the LA Times: Shortage of homes for sale creates fierce competition

Housing inventory has sunk to levels not seen since the bubble years. ... In Southern California, inventories have plunged over the last year. The number of homes listed for sale in April fell 35% in Los Angeles County and was down 42% in Orange, 39% in San Bernardino, 42% in Riverside, 53% in Ventura and 43% in San Diego counties, according to online brokerage Redfin.

Many people who bought at the top of the cycle are so deeply underwater, they can't get the price they need to sell and are therefore not bothering to put their homes on the market.

"We know negative equity holds back home sales, but it also holds back the listing of sales," said Sam Khater, an economist with CoreLogic ...

Glenn Kelman, chief executive of Redfin, said the recovery remains tentative but the market has grown competitive because sellers feel they have time on their side, while buyers feel a sense of urgency given low interest rates and relatively cheap prices compared with the bubble years.

"It is a precarious situation, but the real issue is that nobody wants to sell a house right now," Kelman said. "So now we have classes for our real estate agents on how to win a bidding war."

Negative equity is keeping some people from selling, however most homeowners have positive equity (there are about 75 million owner occupied homes, and about 11 million have negative equity). I think a more important driver of the decline in inventory is price expectations. I agree with Redfin's Kelman who pointed out that "sellers feel they have time on their side".

Earlier I argued:

When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market.

But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell. And buyers will start feeling a little more confident.

This leads to less inventory on the market.

Yesterday:
• Summary for Week Ending June 8th
• Schedule for Week of June 10th