For the missing MLS inventory to return to the market, borrowers need debt forgiveness, and house prices need to move even higher.

The financial media inundates us with stories about the “problem” of low MLS inventory that supposedly holds back first-time homebuyers, who are buying in near record low numbers. Whether or not this is a real problem or a fiction of the financial media depends on your point of view.

Bankers don’t consider low MLS inventory a problem; after all, bankers engineered the MLS shortage in order to drive up house prices to restore collateral value to the bad loans they made during the housing bubble. Homeowners are happy to go along for the ride. Neither bankers nor homeowners consider low MLS inventory a problem.

realtors, lenders, and current entry-level home shoppers consider the lack of MLS listings a huge problem. realtors and lenders consider it a problem because fewer transactions make for fewer commissions and less income. Entry-level home shoppers are frustrated by a lack of choice and high prices for what they might want.

With no consensus on whether or not this is a real problem, there is little political motivation to solve it, particularly if the solutions presented by advocates have a high cost — and workable solutions would be very costly.

Mark Greene, Feb 28, 2016

In 2013 limited housing inventory was blamed on underwater mortgages, struggling affordability and difficulty getting mortgage financing. In 2014 homeowners not ready to walk away from limited equity and others with sub-4% interest rates topped the charts for reasons nobody wanted to sell their homes. 2015 may have been about people not being able to afford a move-up and the still lingering hangover of underwater mortgages. And the blame forecast for the lack of inventory in 2016 already includes some of the usual suspects; move up buyers who can’t find move up homes and homeowners who are underwater or just barely above water on their mortgages. Add to that mix the many homeowners who actually have equity and can move up but are staying put and renovating instead.

I give this author credit for accurately identifying the conditions keeping inventory off the MLS. Many industry observers and financial reporters don’t openly acknowledge the problem with underwater borrowers or a lack of move-up equity, and almost none of them credit the policies of the too-big-too-fail oligarchy for engineering it.

It appears that inventory woes are poised to hamper housing market activity as we stand at the threshold of the Spring market. So what do we do? What can we do?

What should we do? Anything? Why? This obviously isn’t a problem bankers or existing homeowners want to solve as the problem benefits them greatly.

Personally, I would like to see something done to bring more inventory to the market because I write for an audience composed mostly of people shopping for homes, many of them first-timers. And I believe lower house prices and greater access to quality housing is a plus for everyone.

Much is at stake here. Limited housing inventory will mean fewer home purchase transactions needing fewer mortgage and real estate people, who may end up being forced out of the industries because they can’t make a living. The technical term for this is rising unemployment. …

The thought of fewer realtors and mortgage lenders won’t upset the masses, but at least he’s honest about his advocacy.

So here we go, let’s vet these ideas and kick start these markets: If a homeowner’s mortgage is underwater and their mortgage payments are current, facilitate a short sale and allow them to apply for new mortgage financing for a new home right away. The homeowner didn’t cause the value of their property to decline, economic forces did. If they kept their payments current even though they were facing potentially unrecoverable equity losses, that is a responsible homeowner/borrower and we should reward that behavior. Right now that homeowner has to wait 3 to 4 years before they are eligible for mortgage financing after a short sale. Fannie Mae and Freddie Mac can fix this with a simple underwriting guideline change and presto the underwater/little to no equity problem is fixed.

He is right. This would fix the problem. For years I advocated the speedy processing of foreclosures and the elimination of loan modification programs that merely delay the inevitable for the benefit of bankers. If we had recycled these properties years ago, we would have wiped out a couple trillion dollars more in bad mortgage debt, and far fewer people would be underwater.

Of course, there’s a simple reason we didn’t do that and why we won’t do that today: it would wipe out the banking system.

Banks stopped approving most short sales in 2012 because they were better off giving a distressed borrower a loan modification and keep their property off the MLS. The denial of short sales is one of the pillars of lender’s loan modification practices that reduce MLS inventory.

We should rethink and reconfigure the PMI/MIP (FHA) mortgage insurance universe. Affordability for move-up and first-time homebuyers with limited down payment assets is hampered by expensive monthly mortgage insurance premiums. Reducing these monthly premiums will make buying a home more affordable and may just create homeowner candidates out of fence sitters. Additionally, allowing single premium mortgage insurance to be added to the loan amount regardless of down payment, will still protect lenders while at the same time reduce monthly mortgage payments for homebuyers. Affordability rises even in the shallow end of the buyer pool where assets may be limited. …

Just over a year ago the Obama Administration cut the FHA insurance premium in half to stimulate the market. What more does he want? Complete elimination? Someone has to pay for the losses on those who fail to make their payments. His plan would pass these losses onto the US taxpayer, and as one, I am not in favor of that.

Let’s do something now before we trudge through another year of waiting for economic forces to magically alter the stumbling housing markets trajectory that we have been on for too long.

Realistically, we will trudge through another year of waiting for house prices to rise far enough to lift homeowners back above water and provide them with enough equity to make a move-up trade. This isn’t a problem that will go away any time soon. Low MLS inventory is one of the four characteristics of the new normal in real estate.

What would bring back MLS inventory?

I first wrote about cloud inventory three years ago in Must-sell shadow inventory has morphed into can’t-sell cloud inventory. The “problem” of low MLS inventory is entirely a problem of no or low equity. To bring inventory back to the MLS, one of two things must happen: (1) excessive debt must be eliminated, and (2) house prices must go up.

The suggestion the author promoted above to approve more short sales would have eliminated some of the excessive debt. The solution I advocated for years was to foreclose on delinquent borrowers, which also would have eliminated the excessive debt. Of course, both would have bankrupted the banks, but that would have been a feel-good bonus. But seriously, eliminating all the excess debt in the system would have been too costly. The banks couldn’t absorb the losses, so the taxpayer would need to bail them out to a far greater extent than we already did.

Another method of reducing the debt is simply to wait for loan amortization to reduce the balances over time, which accelerates when interest rates are very low. Unfortunately, in their greed, bankers put most private loan modifications on interest-only terms, so these loans don’t amortize. It’s simply not practical to reduce the debts enough to fix the equity problem.

The only real long-term solution to the lack of inventory problem is for house prices to go up. Even if all the bad debt were eliminated, we still wouldn’t have the equity to allow the previously underwater borrowers to execute a move-up trade. Given enough time, amortization will provide some equity, but to really bring out the sellers, we need prices to rise enough to get the previous generation of out of the starter homes they’re currently trapped in.

When you think about it, the policies that create cloud inventory put a minimum price on these houses. Once lenders inflate the price with debt, their loss mitigation procedures prevent that house for ever transacting for less. Lenders already proved their willingness to wait as long as it takes to get out at breakeven, and homeowners want the extra equity needed for a move up.

These conditions will likely force lenders to keep mortgage rates low for a very long time because without rates at 4% or less, house prices won’t rise high enough to bail lenders out of their bad bubble era loans, and an entire generation will spend their adult lives in their entry-level house.

[listing mls=”OC16041116″]