Sales Up, Prices Flat: Not as Contradictory as it Appears

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Back when economics textbooks were printed on paper, I absorbed the basic truths of supply and demand. The more supply, the lower the price. The more demand, the higher the price.

It’s a good thing that textbooks are going digital, because if the latest reports from the National Association of Realtors are to be believed, the basic laws of economics are being rewritten as we speak. Or are they?

Yesterday the NAR announced that year-over-year, existing home sales rose 9.8% in June. (Of course, that is still a fluffy number, as most of the sales under contract by April 30 closed by the initial June 30 deadline to claim the Federal homebuyers’ tax credit. But let’s not rain on the NAR’s parade. )

The NAR number crunchers also revealed that the national median sale price was $183,700, an anorexic one percent higher than a year ago.

So, back to the Cliffs Notes: higher demand should equal rising prices, right? Why didn’t prices rise even more…especially considering that the tax credit gave sellers a little more gumption to hold the line in negotiations?

The answer is implied in another number that the NAR helpfully supplied: that distressed sales accounted for 32% of all sales in June.

We are all familiar with the thwarted attempts of folks trying to buy distressed properties - those would be foreclosures, short sales and the like. Lenders are slow to sign off on the sales; tangled liens, homeowners’ association fees and taxes in arrears threaten to derail deals at every turn. How is it that so many distressed properties are being sold that they account of nearly a third of all home sales?

One factor clears up all these perplexities: investors.

Investors with pots of cash are buying distressed properties in great swaths. Anybody who has been to Costco can confirm that the whole point of buying in bulk is getting lots for little.

Voila, all our mysteries solved. Investors are driving up volume and keeping prices flat (in some regions, prices continue to decline). I hope those investors have pockets down to their ankles. The forecast calls for more waves of bank-owned properties coming soon to a market near you….to markets near all of us.

Image: Phillwatson via Morguefile