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While our Q1 Real Estate Market Reports did contain a few bright spots regarding the housing market, we continue to have plenty of cause for concern. Peaking foreclosures and mortgage delinquencies are among them, but another threat is pent-up supply, or homeowners who want but don’t need to move, and are waiting on the sidelines for hints that the market is improving.

As part of our Q1 Homeowner Confidence Survey, we asked homeowners how likely they would be to put their home on the market in the next 12 months if they saw signs of a turnaround. The results were troubling: 7% said they would be “very likely” to put their home on the market, while 8% said “likely” and 14% said “somewhat likely.”

The 7% of homeowners “likely” to put their home in the market may not seem like a significant number, but that translates to 5.32 million homes (based on a total of 76 million owner-occupied homes in the U.S., from the Census Bureau). In 2009, the National Association of Realtors reported that 5.2 million existing-homes sold in the United States.

The danger of this pent-up supply lies in its contribution to a “saw-toothed bottom,” in which both home values and home sales will oscillate up and down from month to month.  We forecast that the nation will hit a bottom in home values in the third quarter of this year, but that there will be negligible appreciation in home values for three to five years after we’ve reached bottom (near zero or even negative appreciation after accounting for inflation).  Big factors in this forecast are the high inventory of for-sale homes that already exists, continuing elevated foreclosure rates fueled by high negative equity rates and high unemployment rates, and mortgage rates that are expected to be much higher in 2011 than they are now.

An equally important factor in this prediction though is the likelihood that a substantial number of sidelined sellers will put their homes on the market with any signs of improvement. This will have the effect of flooding a recovering market with more inventory, which will keep a lid on home value appreciation.  Since the majority of these sidelined sellers are unlikely to buy a new home until they have sold their current home, the added inventory will not be driven down by these sellers until after they have put their home on the market. These sidelined sellers will essentially put a floor on how low for-sale inventory can fall: when inventory levels fall below this floor, sellers will jump into the market and supply will move back up; while inventory levels are above the floor, they’ll stay on the sidelines.

While we focus on the 7% of homeowners who said they were “very likely” to put their home on the market with signs of a turnaround, a total more than one-fourth (29%) said they are at least “somewhat likely” to put their home on the market. There are clearly millions of homeowners who want to move into a different house or neighborhood, but who, because of negative equity or hesitation to sell and take a loss, have been effectively trapped in their homes for the past several years. When they do take the step to list their homes, it will have a very real effect on the housing market.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).

About the Author

Stan is Zillow's Chief Economist. To learn more about Stan, click here.

  • http://iciclecreekrealestate.com Geordie Romer | Leavenworth WA

    In my market, Leavenworth WA, I think we are starting to see those sellers come on the market already. We are on pace to have record supply like we have never seen before.

    http://iciclecreekrealestate.com/2010/05/11/leavenworth-supply-of-homes-continues-to-grow/

  • james mauer

    It is hard to put any crediblity in zillow housing statistics when they allow land to be listed under
    multi family and single family homes. As an example in my area of 75104 area code approx. 50% single family homes listed, are in reality just lots.
    Sadly,when notified about the incorrect listings no action is taken.

  • http://www.renttobuyguide.co.uk/ Rent to Buy

    The presented pie graph is enough to provide information and details percentage. No matter how less the percentage is, if we are talking about million homeowners ready to sell homes, that’s something different!

  • Jim Fawcette

    Two comments on your site.

    1) The loan estimates ignore whether loans are jumbo, super-jumbo or conforming. the estimator rates for a $1,000,000 loan are just wrong.

    2) house updates are slow to update. This house sold two weeks ago, yet that isn’t shown, while another house a block away didn’t appear until three years after it sold.

    12011 Greenhills Ct
    Los Altos, CA 94022

  • patrick

    In minnesota many of the incumbent properties that you can buy for cash are literaly flood damaged and are way out of level. there foundations are damaged and need huge amounts of work. In some cases i think america needs to rebuild with new homes. because of the lack of maintenance and the neighbor hoods are down right scary and many are afraid of this future economic crash. in that case they are pushing there problems down on you. and your left with hard pressed answears to stay above the flood to even save youreself.

  • http://www.desertmountainhomesonline.com/Blog/ Desert Mountain Real Estate Arizona

    In Scottsdale we are seeing a huge influx of buyers suddenly. The past 6-8 weeks have been c r a z y! Everyone who was sitting on the fence are now jumping into the market at the same time.

  • http://www.foreclosurelistings.com/ Karen

    Before purchasing the house, it is very important that you have the property inspected by a professional.

  • Pingback: Home Sales Up in April, but Inventory Doesn’t Paint a Pretty Picture | Zillow Research Blog

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