If the housing market is sluggish, why the bidding wars?

Yes, it might seem strange, but there is an explanation and it has to do with home prices. Simply put, not enough people are putting their homes on the market because they can't accept the fact that they won't be getting anywhere close to what they could have gotten for their property five or six years ago. Available at kpcc.org and podcast (Business Update with Mark Lacter).

Mark Lacter: It's not that people aren't buying - home sales are actually up compared with last year. It's that the homes being sold are at the lower end. Anything over, say, $500,000 is in fairly short supply because people are concerned about not getting a large enough offer. That's resulted in a big drop in the amount of housing inventory available for sale - the real estate people measure supply by looking at the number of months it would take to sell everything that's currently on the market.

Julian: What's the ideal inventory level?

Lacter: Six months - that's considered idea. L.A.'s housing inventory is now at 4.7 months. Actually, inventory is way down is many of the cities that were hardest hit by the real estate slump. Phoenix is at 2.4 months, Sacramento 1.5. Again, anything under 6 indicates a tight inventory. And this shows you the reluctance of homeowners in those areas to sell.

Julian: And yet, what happens in a market where the supply is limited?

Lacter: Well, demand is likely to be strong. And that explains why some properties are receiving multiple offers - some higher than the asking price. Of course, it's really not like the old days - if you bought an average L.A. home in 2000, appreciation levels have fallen from 180 percent in 2006 - that was right before the recession - to 60 percent currently. And that's the problem: People are unwilling to accept the fact that in most cases they won't be getting anywhere close to what they could have gotten for their home five or six years ago. That doesn't necessarily mean taking a loss - it just means making less of a profit, and for now, that idea is simply unacceptable.

Julian: But aren't many of those homeowners going to sell at some point?

Lacter: They are going to sell because many of them are baby boomers who have reached their retirement years, and who for various reasons have decided that they don't want to own a house anymore. (It could be that their kids have moved out, or they need extra money to live on, or they're running into health problems.) You know researchers at USC just did a study on California's future population growth and they concluded that the number of people 65 and older is expected to quadruple over the next 20 years, while the primary working age population - mainly folks from 25 to 64 - is expected to grow at a slower rate. And that 25 to 64 group might not be interested in buying the surburban house that an older baby boomer wants to sell - certainly not at the price that's being offered.

Julian: Just curious - what percentage of US residents own a home?

Lacter: Only 65 percent, according to the Census Bureau, and that's a 15-year low. Now certainly, the market will pick up as the economy improves. The question is how much of a pickup are we going to see. One interesting development is a rebound in apartment construction - local developers say that you have to go back to 2006 to see as much activity. And with that activity we've seen a steady increase in average rents (along with a drop in vacancy rates).

Julian: Why is that happening?

A lot of it comes down to the general unwillingness and inability of people in their 20s and 30s to buy a home. Now if these folks are more inclined to rent, and if baby boomers are more inclined to rent, you have to wonder about the housing market, not just in the next year or two, but really well beyond that.

More by Mark Lacter:
American-US Air settlement with DOJ includes small tweak at LAX
Socal housing market going nowhere fast
Amazon keeps pushing for faster L.A. delivery
Another rugged quarter for Tribune Co. papers
How does Stanford compete with the big boys?
Those awful infographics that promise to explain and only distort
Best to low-ball today's employment report
Further fallout from airport shootings
Crazy opening for Twitter*
Should Twitter be valued at $18 billion?
Recent Business Update on KPCC stories:
Naysaying emerges in wake of LAX shootings*
Holiday shopping: On your marks, get set... spend!
What to do with all that bad chicken?
Why it's hard to gauge progress of health care programs
Why L.A. isn't being hit too hard by shutdown - for now

New at LA Observed
On the Media Page
Go to Media

On the Politics Page
Go to Politics
Arts and culture

Sign up for daily email from LA Observed

Enter your email address:

Delivered by FeedBurner

Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
LA Observed on Twitter and Facebook