The decrease in distressed and underwater properties is helping boost the housing recovery, but it's not occurring fast enough to ease concerns over rising prices, according to a flurry of recent reports.
In April 2013, the share of distressed property (foreclosures and short sales) sales fell to 33 percent of all sales, down from 43.6 percent a year ago April. That's the lowest recorded by Campbell/Inside Mortgage Finance HousingPulse Tracking Survey since it began tracking distressed properties in 2009. Distressed properties typically sell for a discount, compared to traditional equity home sales. Fewer distressed properties on the market put upward pressure on home prices.
Meanwhile, the share of "underwater" homeowners, those suffering negative equity -- a mortgage larger than a home is worth -- fell to 25.4 percent of all mortgaged homeowners during the first quarter this year, down from 31.4 percent a year ago, according to Zillow's Negative Equity Report.
Rising prices add equity to home values, helps homeowners emerge from their underwater status and become more likely to to sell. More homes on the market put downward pressure on prices.
Move-up buyers stuck
Unfortunately, sufficient numbers of homeowners aren't coming to market fast enough to help offset the tide of rising prices generated by distressed properties leaving the market.
Zillow said many homeowners no longer suffer negative equity, but too many still don't have sufficient home equity for them to make a move. These homeowners have some equity, but not enough to cover selling costs as well as a down payment and buying costs of a move-up home.
Zillow says that leaves the "effective" negative equity rate at 43.6 percent - nearly half of all mortgage homeowners don't have the financial incentive necessary to go to market.
"Looking at the effective negative equity rate could explain why recent, healthy declines in the number of underwater borrowers haven't yet translated into more homes for sale. The only cure is patience, as rising home values continue to build equity to the point where more homeowners can realistically sell," said Zillow Chief Economist, Dr. Stan Humphries in a prepared statement.
Buyers lose confidence
With inventories only slowly increasing and both home prices and mortgage rates on the rise, potential buyers are wringing their hands, according to yet another report.
A recent Redfin survey found in the first quarter 2013, 31 percent of buyers believed it was a good time to buy, down from 40 percent in the previous quarter.
However, rising prices have other buyers running scared. The Babb Group founder, real estate author, investor and media commentator Dr. Danni Babb, says fear can be a good thing.
"The new market is artificial. This time it's propped up by cheap money (low interest rates), the last time it was easy money (loose credit). Buyers need to be highly aware of overinflated and possibly unsustainable pricing," Babb said.
Redfin's survey found that 48 percent of buyers said price hikes was a major concern, up from 40 percent in the previous quarter and twice that from a year ago. The short supply also remains a major concern among 65 percent of buyers, virtually unchanged from the previous quarter's 66 percent.
However, buyers who do land a home loan and manage to get to market know they'll have to pay more as the recovery continues -- 41 percent indicated low inventories have caused them to consider paying more for a home, up from 34 percent in the first quarter and just 26 percent in the fourth quarter.
The vast majority of homebuyers accept the inevitable – home prices will continue to rise in the immediate future. Redfin reported 79 percent of home buyers said they believe home prices will increase in the next 12 months, 23 percent of them think prices will rise "a lot."
Maybe, maybe not.
Babb says the market has yet to see the much feared "shadow inventory" come to market. "These are properties banks won't release because the values are appreciating. When they are released, the market will suffer," Babb said. She added, "If rates go up and buyers can't afford it, it's the implosion of the markets once again. Bidding wars and investors? It's very 2005ish."