By Prashant Gopal, Bloomberg,  Feb 7, 2014 5:58 AM PT

Suzanne Baker and her siblings bought a foreclosed home in Atlanta two years ago, added a fourth bathroom, then waited for values to rebound before considering a sale. Now, she says, they’re ready to cash in.

The family last month listed the four-bedroom house in the affluent Buckhead neighborhood for $710,000. It was purchased as an investment for about $375,000 in late 2011, before bulk buyers snapped up many of the area’s distressed homes, helping to drive up prices in Atlanta by more than 25 percent.

“The market is back up,” Baker said. “We think we can make a good amount of profit so we’re going to try.”

For two years, a shortage of sellers like the Bakers has propped up prices across the U.S. as shoppers jostled for a dwindling supply of houses. Now, as the market’s busiest season approaches, escalating values are spurring more listings as homeowners regain equity lost in the worst crash since the 1930s. While new-home construction at a third of its 2006 peak will keep inventory tight, the supply increase is poised to damp price gains while higher mortgage rates cut into demand.

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For would-be buyers, more choice would mean relief from the bidding wars of last year, when the supply was at a 12-year low leading into the key spring season. The period traditionally starts in mid-February, with deals picking up in the following months as weather in much of the country starts to warm.

Prices “won’t be rising as much as they were rising last spring.” said Jed Kolko, chief economist of San Francisco-based Trulia Inc. (TRLA), operator of an online property-listing service. “It will be a less frantic market with more inventory and fewer investors.”

Tightest Markets

The number of available homes climbed on a year-over-year basis in each of the last four months of 2013 after 30 straight declines, according to the National Association of Realtors. The increase in December was 1.6 percent.

Inventory rose the most in some of the tightest areas, from Arizona and California to Georgia and Florida, where leaps in prices erased negative equity and encouraged homeowners to lock in profits, according to a separate report from Realtor.com, the property-listings website for the Realtors association.

In Sacramento, California, where asking prices climbed 11 percent last year, listings jumped 58 percent in December, according to the website. The supply rose 35 percent in the Minneapolis area; 31 percent in Orlando, Florida; 27 percent in Atlanta; 24 percent in Dayton, Ohio; 23 percent in Oakland, California; and 21 percent in Phoenix.

Slowing Gains

“Rising inventory is the primary reason that we expect the pace of price gains to drop back,” Paul Diggle, property economist for Capital Economics Ltd. in London, said in a telephone interview.

Prices nationwide will climb 4 percent this year compared to 2013’s expected 11 percent gain, according to Diggle. Increasing mortgage rates also will weigh on prices because the higher costs will push some buyers out of the market, while forcing others to look for cheaper deals, he said.

Diggle’s firm projects 30-year fixed mortgage rates of 5 percent by the end of the year. That compares with the average this week of 4.23 percent, according to data from Freddie Mac. Rates will climb as the Federal Reserve scales back bond purchases that have bolstered the housing recovery by holding borrowing costs down, he said.

While rates have leveled off after reaching a two-year high in August, a jump from near-record lows in May has contributed to cooling demand. In December, contracts to buy previously owned houses fell by the most since May 2010, data from the National Association of Realtors show. Completed purchases rose 1 percent from November for the first gain in five months.

Buyer Enthusiasm

“Buyer enthusiasm has really softened in the past three months,” said Lawrence Yun, the Realtors group’s chief economist, who said colder-than-normal weather may be partly to blame. “In some markets, prices may rise further and buyers will want to catch it” before the increases put them out of their budget.

In Southern California’s Inland Empire, east of Los Angeles, homeowners got a jump on the spring selling season and began listing properties earlier than usual, said Paul Reid, an agent with brokerage Redfin.

Sellers are “nervous about what the spring is going to bring,” said Reid, who is based in Temecula, California. “They don’t know if everybody will list this spring then you’ll have a big counterbalance toward too much inventory, or if there’ll be a crunch again. They figure they’ll get out ahead of the market, list, sell and be done with it.”

Weak Demand

Rising inventory may unlock sales in severely constrained markets such as California’s Silicon Valley, where homes spend a median of 18 days on the market, according to Redfin data.

While those types of areas will benefit from more supply, demand in much of the country remains relatively weak and won’t recover without stronger job growth, said Sam Khater, senior economist for CoreLogic Inc.

Adjustable-rate mortgages, used by first-time buyers in past decades to purchase more expensive properties, may not be an option because of stricter lending standards adopted after the housing crash, he said.

“More supply will not create its own demand,” Khater said. “It will slow prices to a more sustainable rate of growth, but it won’t make the market more affordable. Once prices reach their natural state, future price appreciation will depend on income increases.”

Job Growth

The U.S. gained 113,000 jobs last month, less than economists’ forecast for a 180,000 increase, even as the unemployment rate fell to a five-year low of 6.6 percent, Labor Department data showed today. The jobless rate for Americans in their early 20s, many of whom are living with their parents longer rather than renting or buying homes, was almost 12 percent.

First-time buyers accounted for 27 percent of completed home purchases in December, down from 30 percent a year earlier, according to the Realtors group.

An increase in supply would indicate the housing market is moving toward more normal conditions as it rebounds from the five-year slump that started to turn around in 2012.

“Inventories had been very, very low and still are despite this turnaround,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania. “It’s part of the process toward normalization, although the weakening in demand needs to be watched very carefully because if demand does not pick up in the spring, that’s going to call into question the strength of any recovery.”

More Homebuilding

For homebuilders, the spring selling season traditionally starts the weekend after the National Football League’s Super Bowl, which was played five days ago. Companies are stepping up production, adding to the options for buyers. New-home starts, which rose 15 percent in 2013, will jump 25 percent this year, according to Brad Hunter, chief economist of Metrostudy, a research firm that tracks construction.

While sales are poised to rise as the economy improves, higher mortgage rates and aggressive builder price increases slowed demand in the second half of 2013, he said.

“It’s going to be a good season for homebuilders, maybe just not as good as last season,” Hunter said. “There are more projects operating this year than last year so it’s a more competitive environment.”

PulteGroup Inc. (PHM) and D.R. Horton Inc., the second- and third-largest U.S. homebuilders by market value, said January sales were encouraging.

‘Very Positive’

“We’re right on the cusp of a strong spring selling season,” Donald Tomnitz, chief executive officer of Fort Worth, Texas-based D.R. Horton, said last week on the company’s earnings conference call. “The spring selling season has started a little early, for our company, and that’s a very positive thing.”

In Atlanta, home starts surged 67 percent in 2013 — the biggest jump on record — and many of those properties will be completed this year, said Eugene James, Metrostudy’s director in the region.

Buyers of existing homes will face less competition from investors, who have caused shortages in many areas. Bulk purchases will start to slow as the foreclosure crisis fades and bargains disappear, according to Khater of CoreLogic. Multibillion dollar private-equity firms such as Blackstone Group LP — which helped drive up prices by buying thousands of single-family homes to rent in Arizona, California and Florida are already are looking elsewhere.

Phoenix Investors

In the Phoenix area, institutional buyers purchased 44 properties in December, down from a peak of 831 in July 2012, according to Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P Carey School of Business.

Active listings, excluding homes under contract, jumped 34 percent in December from a year earlier, while foreclosures and other distressed properties — the main source of supply for investors — fell 24 percent, Orr said.

Price gains in the area are easing, with a 20 percent increase in 2013 compared with 31 percent in 2012, Orr said. Home sales in December fell 11 percent from a year earlier and the decline may have been much higher in January, he said.

“Demand is still weak and supply has been growing faster than last year,” Orr said in an e-mail. “I’m not seeing any likelihood of further price gains in the near term. Sales concessions are on the rise and list-price cuts are widespread.”

Orlando Shift

In Orlando, sellers aren’t getting as many offers as they did a year ago, said David Welch, a Realtor with locally based Re/Max 200 Realty. The market has changed since October 2012, when the Orlando Sentinel reported that a bank-owned property drew 64 offers before fetching $86,000 — about 23 percent more than the asking price.

The median home price in December was $160,150, up 21 percent from a year earlier, according to the Orlando Regional Realtor Association. Sales dropped 5.2 percent, while new listings rose 24 percent.

“Prices have gone up quite bit,” Welch said. “That house that was a great investment a year ago has gone up 20 percent and may not be anymore.”

For Baker, the director of a nonprofit community revitalization group in Atlanta, the timing seems right to jump into the market and sell her family’s investment. The house, which she and her siblings used off and on in the past two years, is now vacant, and as a part-time student working on a master’s degree in social work, she can use the extra cash.

“We’re trying it now and we’ll see what bites we get,” Baker said.

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