2017/03/29

Double-Edged Sword: Home Prices Keep Rising, Home Inventory Keeps Falling

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You are thinking about selling your home. A similar place nearby sells for more than you thought it would. You list your home. This is how the housing market is supposed to work. As a result, over time, price growth should beget inventory growth. That’s not how things have been going lately.

The number of homes for sale has declined for two years straight and in the first quarter of 2017 hit the lowest level since the housing market recovery began in 2012. In February there were just 161.1 existing homes for sale per 1,000 households, according the the National Association of Realtors. At the same time, home prices have been rising more or less since 2012, in many markets matching or surpassing pre-recession highs.

It turns out price recovery is a double-edged sword. According to an analysis out last week from real estate data and search site Trulia, markets where home values have gained the most since the recession actually have the tightest supply right now.

“A strong recovery may be partly to blame for the large drop in inventory some markets have experienced over the past five years,” writes Trulia Chief Economist Ralph McLaughlin. “On average, the more valuable a market’s housing is compared to pre-recession levels, the larger drop in inventory it is has seen.”

"Typically, what you would expect is that as home prices increase, so does inventory – with higher home prices encouraging more homeowners to sell," explains Daisy Kong, Trulia spokesperson. "But instead, many markets where there is too much recovery are seeing an even bigger drop in inventory. What’s likely happening is that potential sellers don’t want to sell in a hot market because they are afraid they won’t be able to find another house to live in once they sell." 
Home Value Recovery vs. Inventory Change
In Omaha, Neb., home values are currently 44% higher than the city’s pre-crisis peak, the strongest recovery of the country's 100 largest metropolitan areas. (Markets that fell further in the downturn may have gained more from the bottom, but Omaha has the largest current advantage over its previous high.) Over roughly the same period—since the first quarter 2012—inventory in Omaha is down 48%. Homes in San Francisco, a city synonymous with soaring real estate prices, are currently 33% higher than the last peak. Inventory has declined 62%. Meanwhile, in Denver, Colo. home prices are 36% above the last peak, while inventory is down 61%.

Supply is lagging across the country, down 33% in five-years on average for the largest metro areas. But overall, markets where current home values are more than 5% higher than their pre-recession peak have experienced the biggest inventory shock, down 43% on average.

Alternatively, prices in Miami are just 86% of the peak, and inventory there has risen 23%. Unfortunately for most Miami residents the inventory gains have mostly been on the high end, making the city a tough place to buy and rent.

Trulia
The share of homes on the market at premium prices has increased in the last year.
Across the country, lower price point homes have been hit hardest. The report breaks the market into three segments: starter homes (the bottom third of the listings in a market by price), trade-up homes (the middle third) and premium homes (the top).

Starter home inventory has dropped 8.7% in the past year and now constitute just 25.9% of homes on the market. On the other hand premium home supply dipped just 1.7% and make up 51% of available homes. Meanwhile, starter homes require a growing share of monthly income, currently 38.8%, while premium homes require just 14%.

Some real estate pros argue the problem is poorly priced inventory, rather than a total lack of it. In a note on the latest home resale rates Samantha DeBianchi, founder of DeBianchi Real Estate in South Florida, wrote: "Despite reports of 'little inventory,' I don't know how accurate that truly is. I am seeing properties listing in an entirely wrong price point which makes people feel there's little inventory, but in reality, we have too much of it. For example, in the Miami market, a property that should be listed at $500k is listed at $650k - $699k. Furthermore, I am constantly seeing major price reductions of 20% - 25% off list prices."

There is a “tricky conceptual relationship between home values and inventory,” writes McLaughlin. “Too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.”
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