Housing recovery hindered by negative equity

— -- Scott Andresen would love to sell his Seattle house. He just can't afford to.

The 41-year-old policeman and his wife, Rebecca, an environmental consultant, bought the house six years ago. Because of falling prices, they now owe at least $25,000 more on it than it's worth.

The couple would like to move to a better neighborhood with better schools for their children, ages 7 and 4. But they'd have to write a check to cover the difference.

"We can't get out, because it would be too expensive," Andresen says. "It's very frustrating."

Homeowners like the Andresens inhabit just about every housing market nationwide, and their reluctance to sell is having an unexpected impact on the U.S. housing market, which is showing signs of stabilizing after years of declining prices.

Rather than a housing market defined by weak demand and falling prices, the market is now being hampered by a restricted supply of homes for sale as demand improves. That's leading to multiple offers in dozens of markets, rising prices in some and a more volatile housing recovery than many expected.

"When you get (houses priced) under $125,000, it's like a frenzy," said Linda Schlitt-Gonzalez, owner-broker of a Coldwell Banker franchise in Vero Beach, Fla. "It's not unusual to have five offers."

Negative equity, also known as being underwater, is a big part of the issue. Nationwide, almost three of 10 homeowners with mortgages have no equity in their homes or less than 5% equity, says market researcher CoreLogic. Those homeowners would have to write a check in a traditional sale, so many are not selling. Other homeowners, seeing prices rise or stabilize after falling for six years, are holding out for more price increases, Realtors and real estate experts say.

"We thought, if demand was there, there would always be sellers. But instead the supply is sitting on the sidelines," says Stan Humphries, economist for real estate website Zillow. "The inventory phenomenon … will make for a more volatile housing recovery than what we initially expected," he says.

Prices in certain markets may rise faster than expected, given shortages of homes for sale, then level off when homeowners and home builders add to supplies and banks unload more financially distressed properties, Humphries says. He had expected home prices to stop declining, then level off for years before trending up.

The nation had a 6.6-month supply of homes for sale in May, the National Association of Realtors reported. That's considered a balanced market. But NAR also reported "broad-based shortages" of lower-priced homes for sale in much of the country outside of the Northeast, "extremely tight" supplies in most price ranges in the West and "widespread" inventory shortages in much of Florida.

Of the 18 major markets tracked by real estate brokerage Redfin, 10 had less than a three-month supply of homes for sale in May. Those included Seattle, Phoenix, Denver, Sacramento, the San Francisco Bay Area, Washington, D.C., and parts of Southern California.

Tara and Steve Andersen are seeing the low inventory up close.

They're not selling their Southern California home, because they can't find anything to buy. Their town, Placentia, now has just a one-month supply of homes for sale, says data tracker ReportsOnHousing.com.