Are There Too Few Homes For VA Mortgage Buyers?

The latest worry on the real estate front is that VA borrowers face a shortage of homes to consider. This seems like an unusual concern given that during the past few years there have been major foreclosure centers where it's been tough to give away a house.

But now, according to the National Association of Realtors, we have an inventory shortage.

“What we need now is additional inventory in the lower price ranges, so we hope banks will be releasing more foreclosure inventory into the market," said NAR President Moe Veissi. "With gains apparent in all of the price measures, banks also should have more confidence in expanding mortgage credit to home buyers using safe but sensible standards."

But is it really true that fewer homes are for sale?

Home sale volumes change every year. For instance, existing home sales topped 7 million units in 2005. But that was a record created by the availability of toxic loans which would soon lead to millions of foreclosures. Alternatively, VA loans were not at all popular during the go-go years of real estate – the program only had 161,000 loans in 2005, a number well below the average for the previous 20 years.

So perhaps cranking up real estate volume is not the best financial option if it means that perilous financing is needed to artificially boost home sales.

VA Keeps Standards

To its credit the VA stuck with its guns during real estate's go-go era. The VA did not allow "no doc" loan applications for new loans and it did not change its standards to permit prepayment penalties or other gotcha clauses. The result was that vets and their families were very well served by the safe and secure VA mortgages they were able to obtain.

This year, according to NAR, existing home sales should top 4.5 million units. That's a lot less than the 7 million units we saw just a few years ago but it's hardly a sign of depression. No less important fewer home sales might actually be good for real estate values.

Let's imagine that the lenders expected to increase foreclosure inventories by 1 million units in both 2012 and 2013 decided to quickly throw a large percentage of them on the marketplace. Home prices – which remain troubled – would immediately fall. That would not be good for present owners and it would also not be good for local governments. With lower home values property taxes would decline and therefore local governments would have fewer dollars to provide needed services such as police, fire and schools.

Stronger home prices are necessary because without them millions of people who have lost equity are unable to sell and pay off their current mortgage debt. The better option is to hope that home prices rise so that fewer owners -- and lenders -- face the possibility of loss. On the flip side, homeowners would enjoy the currently competitive market on loan rates - as is the case today.