Photo: Robert Clark
National housing inventory levels are well below historic norms, and that’s driving prices up. This has left US homebuyers in some markets struggling with affordability as there are few homes available in their price range.
While most real estate experts agree inventory is at near-record post-recession lows, they don’t agree on why, according to a report released last week by the listing site Trulia.
Based on Trulia’s in-depth report, here are four conclusions about what’s behind the country’s housing inventory crisis:
1. New construction levels have a significant impact on inventory.
Homebuilding, or a lack thereof in some markets, is the biggest culprit of the country’s inventory crisis, says Trulia. Nationally, homebuilding levels are lagging while demand continues to heat up, especially in many of the country’s hottest markets. Affordable for sale homes can hard to come by in some markets, especially in the entry-level market — leaving many potential homeowners on the sidelines.
“Though new housing supply has been increasing solidly over the past 5 years, we’re still only building homes at about 65% of the 50-year average,” Trulia’s Chief Economist Ralph McLaughlin tells BuzzBuzzNews.
And if the pace of homebuilding accelerates, that could be good news for entry-level buyers.
“As new construction picks up in the coming years, we should thus expect increasing entry-level to increase, either through new entry-level homes, existing ones, or both,” McLaughlin tells BuzzBuzzNews.
While some hot markets have seen more high-end housing construction than entry-level, McLaughlin says all new construction helps entry-level buyers.
“New construction has a trickle-down effect: new homes allow existing homeowners to trade up, which frees up existing housing supply, which allows existing starter homeowners to trade up, which frees up entry-level homes, and so on,” McLaughlin explains to BuzzBuzzNews.
2. Investor ownership thwarting homebuyers.
Many homes were purchased by investors to be used as rentals during the Great Recession, and remain unavailable to homebuyers. Trulia found that if investors reduced their share of ownership by small percentage points, it could add a hundred or more homes to an area’s market.
For example, if Boston, MA investors reduced their share of ownership from 43.7 percent to 42.7 percent, housing stock would increase to 3,382 from 3,290, according to Trulia’s data. On average, for every one percentage point of ownership by investors, a market’s housing stock is about 2.8 percent lower.
“The silver lining from these results is that investor activity is a factor that could be made more attractive through a combination of strategically targeted land use, tax, and financial policies,” McLaughlin observes.
3. Baby Boomers’ positive effect on inventory.
Markets where Baby Boomer homeownership levels are high tended to have higher inventory levels, says McLaughlin. Trulia discerned that every one percentage point increase in inventory owned by Boomers correlated with inventory that is about 3.6 percent higher.
“It’s tough to say exactly why, but we think the effect is driven by the fact that markets with the largest share of boomers just happen to be in retirement destinations such as Florida and Arizona – states that haven’t much been impacted by low inventory because they tend to build a lot of homes,” he adds.
However, Boomers could be “problematic” to inventory in the near future should they decide to age in their homes instead of sell and move on to a retirement home. As it stands now, many Boomers have been staying put since they are worried they won’t be able to find an affordable home to move into after they sell.
4. Price increases have impacted affordability in some markets.
There’s the notion that markets that have seen large price increases have lower inventory because homes became unaffordable. McLaughlin says that in fact rapid price growth has had very little impact on inventory.
“A one percentage point increase in home value recovery is correlated with a 1.6 percent decrease in inventory across the 100 largest metros,” he says.
Similarly, McLaughlin disproved the hypothesis that in markets where “premium” homes were significantly more expensive than starter homes, inventory was tight because it was harder to trade up. In this scenario, a one percentage point increase in the price spread between starter and premium homes correlated with just a 0.2 percent increase in inventory — “close to being economically insignificant.”
Click here to read the entire report.