December 19th, 2016 5:07 AM by Jackie A. Graves
When you analyze the housing market at the end of a year, you can
often spot trends — and 2016
definitely had a big one: a lack of inventory, or supply, of homes
for sale. Once you couple low inventory with strong buyer demand, which we also
saw in 2016, you’ll probably see home prices rise. Using research from Trulia,
here’s a look at the year in review to explore how low inventory affected the
real estate market, from homes for sale in Sarasota, FL, to Portland, OR.
1. What home types had the lowest inventory?
There are three main price-range segments — starter homes (lowest
price range), trade-up homes (middle price range), and premium homes (highest
price range) — and homebuyers are mainly interested in homes within their
particular segment. For example, if you’re in
the market for your first home, you probably don’t care too much
about what the market is like for premium homes; you’re quite likely focused on
those starter homes.
Trulia’s research shows that in 2016, starter homes saw the
biggest decrease in inventory of all homes on the market, dropping by 10.7%
from 2015. Trade-up homes dropped almost as much, 9.2%, for that same period.
Premium homes dropped as well, but only by 3.6%. Low inventory often
contributes to whether we have a buyer’s or seller’s market. The Denver, CO, market provides a good example. “There was
bifurcation in the market for homes less than $600,000 and more than $700,000,”
says Denver agent Matt
Vos. “For homes below $600,000, it was definitely a seller’s market.
For homes more than $700,000, it was more of a buyer’s market.”
The group most affected by lower inventory in 2016? First-time
homebuyers. They paid 1.7% more for a home than they paid in 2015. Because this
group paid more, a larger portion of their income went to housing. And that put
first-time buyers close to (or over) the 36% debt-to-income limit many mortgage lenders allow.
“The low inventory made transactions much harder to accomplish,”
says Vos. He found that buyers often needed to put intangibles in their offers
deals done, such as offering to pay with cash, closing quickly,
waiving the inspection or appraisal, or including a heartfelt letter.
2. Where did starter homes inventory decrease
Although 2016 was a difficult year overall for buyers to find
starter and trade-up homes for sale, some areas had bigger decreases in starter
homes on the market than others. Leading the pack was Salt
Lake City, UT, which saw an 87.9% decrease in starter homes from the
period between 2012 and 2016, according to a Trulia
Inventory and Price Watch report. San Antonio, TX, was
close behind, with an 86.2% decrease, and Austin, TX, was third, with an 82.9% decrease.
3. Which markets had the most unaffordable
Inventory is one factor that affects prices but not the only one.
Demand also plays a part. According to the same Trulia report, the most
unaffordable starter homes of 2016 were largely in California, which has both
low inventory and high demand — contributing to high prices — in many areas.
First-time buyers in the metro areas of Los Angeles, Oakland, Orange County, Sacramento, San
Francisco, and San Jose used between 23% and 29% more of their
income to buy a home in 2016 than they did in 2012. High prices often mean that
many people who would have bought a trade-up or even a premium home in other,
less expensive markets buy starter homes instead.
4. Did some markets experience an increase in
real estate inventory?
Not every market in 2016 followed the national trend of low
inventory. Trulia’s research reveals some markets experienced a rise in
inventory for the period between the third quarter of 2015 and the third
quarter of 2016. Florida had the biggest increases in housing inventory: The Cape Coral-Fort Myers area led the field, at 36.7% more
homes for sale. Fort Lauderdale, Miami, and West Palm Beach and also saw
housing inventory increase. Several California cities experienced increases in
housing inventory as well: Fresno, CA, at a 24.4% increase, topped the list.
Bakersfield, San Diego, and San Jose also saw housing inventory
City, OK, experienced an inventory increase as well.
5. Why the discrepancy in markets?
Trulia’s analysis shows that the Southwest and Southeast
regions have, for the most part, been meeting buyer demand, keeping prices
affordable. But the Pacific Northwest and the Northeast haven’t been meeting
buyer demand, causing prices to rise. So what’s the reason for this regional
difference? In a word: elasticity.
Elasticity (the tendency of housing supply to move up or down in
line with price changes) is measured by the gap between home prices and housing
stock. For example, Las Vegas, NV, an area with increased housing inventory,
is considered to be elastic — it saw a 75.2% increase in home prices over the
past 20 years, but also had an 87.8% increase in housing stock over that same
period. Compare that with low inventory in San Francisco, an inelastic city,
which saw a 290% increase in home prices over the past 20 years with only a
12.3% increase in housing stock.
6. How does demand impact low inventory?
If there’s little demand to buy in any particular area, low
inventory doesn’t necessarily mean higher prices. In fact, prices could drop in
low-inventory markets if demand drops even more. Trulia’s
several markets where demand has dropped more than inventory during the period between
the second quarter of 2015 and the second quarter of 2016. The two areas with
the biggest drops in inventory that also experienced falling prices (for
starter homes) were Columbia, SC (with
a 22.2% drop in inventory), and Charleston, SC (with
a 21% drop in inventory). The two biggest drops in starter home prices where
inventory also fell were in Charleston, SC (with a 5.1% drop in home prices),
and Louisville, KY (with
a 4.3% drop in home prices). Richmond, VA (with
a 4.1% drop in home prices), was a close third.
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