Supply Dropping

Prices of properties in Phoenix climbed as the inventory of houses for sale dropped to about 14,700 in December, about half of the normal level, according to Tina Waggoner, a real estate broker in Phoenix, and the one who sold Medved’s property last year.

“The supply has dropped substantially,” said Waggoner, who specializes in distressed sales. “Cash investors are beating out buyers all the time.”

JPMorgan analysts led by John Sim estimate the price growth last year was responsible for a drop of almost 4 million in underwater borrowers. The number of homeowners that owe more on their mortgages than their properties are worth may fall to 4 million by the end of 2015, according to Sim, whose team was the top-ranked for non-agency residential mortgage securities in Institutional Investor magazine’s annual survey for the past four years.

Constrained Inventory

While a 5 percent increase in home prices could lower the number of underwater borrowers to just above 5 million, a move of that magnitude in the other direction would push it back over 10 million, he wrote in the Jan. 4 report.

Supply across the country is being been constrained as institutional investors including Blackstone and Colony Capital LLC have pushed out traditional buyers competing for a dwindling number of properties.

Blackstone, the largest U.S. private real estate owner, has accelerated purchases of single-family homes as prices jumped faster than it expected, spending more than $2.5 billion on 16,000 homes to manage as rentals, Gray said during an interview last week. That’s up from $1 billion of homes owned in October, when Blackstone Chairman Stephen Schwarzman said the company was spending $100 million a week on houses.

Blighted Neighborhoods

Underwater borrowers, who can’t sell without taking a loss, contributed to rising levels of foreclosures, which blighted neighborhood prices by increasing the number of abandoned homes. It also increased the phenomenon of borrowers who saw little chance of their homes ever being worth what they owed on it sending the keys back to the bank and moving out, known as strategic default.