Real estate's new hidden market

Twice in the past two years, Matt and Christine Krol have put their Cave Creek, Ariz., house on the market. And twice, without any serious bids, they have removed the "For Sale" sign and rented out the house with its new granite countertops and inviting swimming pool.

"We never wanted to be landlords," says Ms. Krol from Puerto Rico, where she has moved. "We would still sell it if it went along with the lease and tenants, and the market improved."

Across the country, sellers discouraged by the prices offered for their homes, or tired of watching people traipse through their bedrooms, are yanking their homes off the market. While it's difficult to say how many houses this might be, housing experts believe the numbers are substantial. The implications of this "shadow inventory" are widespread: the housing market may be slow to come back, affecting everything from when Americans retire to whether they can afford to move to find a new job.

"I'm not sure how you measure it, but there are a lot of pent-up sellers," says Mark Zandi of Moody's Economy.com. "They will come out once the market finds firmer ground."

On Tuesday, there were few signs of firmer ground. The National Association of Realtors (NAR) reported March existing home sales declined 2 percent from February, a period when sales normally would start to rise. Median home prices fell for the seventh month in a row and are now 7.7 percent below a year ago. The inventory of unsold homes rose 1 percent over last month.

At the same time, foreclosures in March were up 57 percent over a year ago, according to RealtyTrac, an Irvine, Calif.-based company that tracks real estate sales. Foreclosures were 5 percent higher than February. According to the company, foreclosures now represent about 25 percent of all the houses for sale.

On April 9, the continued problems in the housing market prompted the Bush administration to announce an expansion of a Federal Housing Administration (FHA) program to help subprime lenders who are late with their payments. The FHA expects 500,000 families will use the program to refinance into prime-rate, FHA-insured mortgages by the end of the year.

However, critics of the Bush administration called it too little too late, since some 2 million additional homeowners are facing foreclosure.

According to the Census Bureau, in the fourth quarter of last year, there were 2.2 million vacant homes for sale. In a normal market, there should be about 1.2 million for sale. "Those numbers will rise in the first quarter [of 2008], particularly with the surge in foreclosures," says Mr. Zandi.

The NAR, which does not seasonally adjust its numbers, estimates in March there were 4.058 million existing homes on the market. In January, there were 4.16 million homes for sale. Since the number of homes for sale normally increases in that time period, those 102,000 homes that were no longer on the market are "implying that people just pulled their homes off the market," says Lawrence Yun, chief economist for the NAR in Washington.

In terms of the monthly supply of homes on the market, it would take 9.9 months at current sales rates to work down the supply of houses. In the early 1990s, during the last housing market downturn, there were 10 months' worth of houses to sell, says Mr. Yun.

There are few immediate hopeful signs for homeowners. In its March assessment of the economy, the Federal Reserve Open Market Committee said it expects home values to continue to fall and suggests that lower home prices and stresses in the financial markets "could lead to a more severe and protracted downturn in activity than currently anticipated."

One of the problems is a lack of buyer confidence in the stability of house prices. "Many buyers feel prices are going lower, not higher, so they decide to wait a month," says David Blitzer, managing director at Standard & Poor's in New York. "It is typical when you have a falling market, trading activity dries up."

Some economists think the shadow inventory will only start to come down once sellers realize prices are not returning to their peaks for some time. "It's just unthinkable they would go back to the 2004-2006 period when speculation fueled the price rise," says Dennis Hoffman, a professor of economics at the W.P. Carey School of Business at Arizona State University in Tempe.

Getting sellers to lower their price is one of the biggest challenges, says Katy Curtis, a Realtor with RE/MAX Fine Properties in Scottsdale, Ariz. When prices dip near 2005 prices, "we get a lot of activity," she says.

However, there is a massive overhang of houses for sale in the Phoenix area, says Ms. Curtis. In 2005, there were 5,500 homes on the market; today, there are 46,000 listings.

But lowering the price hasn't helped the Krols. They reduced their price from $481,000 to $380,000. Not selling the Arizona house has kept them from buying in Puerto Rico. "We don't want to get stuck with two homes," says Krol. But, she adds, "If we can't sell the house we might have to move back at some point, since it's the only house we own."