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RISMEDIA, May 24, 2010—While Zillow’s 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 on 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.

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