For Housing Market, Key Factor is Inventory

The housing market word of the year for 2018: Inventory–or lack thereof.

And like the housing industry this year, inventory was a tricky thing, as inventories generally increased, although not at the pace for a sustainable housing market.

Trulia, San Francisco, reported after some promising signs of progress in the third quarter, U.S. inventory took a few steps back in the fourth quarter, falling 4.6 percent year over year. “While this marks the ninth consecutive quarter of declining inventory, we actually see double-digit inventory gains in some of the most expensive markets–especially in pricey coastal California metros,” Trulia said.

Key findings from Trulia:

–Buyers face tighter inventory heading into 2019. This drop was driven by the premium home segment where the number of for-sale homes fell 7.8 percent year over year, followed by modest declines across starter homes (down 2.2 percent year over year) and trade-up homes (down 1.5 percent year over year).

–Among U.S. metros with the biggest gains in inventory, six were in California, most notably in San Jose (66.6 percent year over year increase), San Francisco (36.5 percent) and Oakland (29.2 percent). These gains were largely driven by a much-needed increase in starter and trade-up homes.

–Rapid price growth has put starter homes increasingly out of reach for many homebuyers as affordability worsens–a typical starter home-buyer should expect to pay 41 percent of their income on a monthly mortgage payment, up from 34.2 percent a year ago.

Meanwhile, Zillow, Seattle, offered a more measured view on inventories, noting growth for the third straight month–a good signal for buyers, said Zillow Senior Economist Aaron Terrazas, but “meaningful change to market trends is yet to come.”

Zillow reported housing inventories increased by 0.4 percent from a year ago, third consecutive month of growing inventory. But inventory levels are still well below where they were five years ago, and small increases have yet to meaningfully reverse those deficits. A year ago, inventory fell 9.1 percent on an annual basis.

Zillow noted some of the markets previously among the hottest in the country saw the biggest increases in available homes. Meanwhile, the number of homes available to buyers in Kansas City, Las Vegas and Washington, D.C., fell at a double-digit pace in November, a sign that the inventory recovery has not reached every market.

“After years of intense inventory shortages and cutthroat competition, any gains in inventory should be embraced by home buyers, Terrazas said. “Unfortunately, the small recent gains are not nearly enough to fully erase the existing deficit, nor are they evenly distributed–there are roughly twice as many homes available for sale in the higher reaches of the market than there are at the lower, more competitive end. Rather than calling this a true inventory recovery, it’s probably more accurate to say that inventory levels are no longer in a free fall and are currently bumping along the bottom.”

And unfortunately, Tererazas added, “it’s looking increasingly unlikely that we’ll see a meaningful upward surge in inventory any time soon. Building activity has been sluggish at best. And potential sellers may now be thinking twice about listing their home for sale in a rapidly rising interest rate environment, when a similar home to the one they’re already in–let alone a larger or more expensive one–is likely to cost them more per month. This is a step in the right direction, but there’s a long march to go.”

Pro Teck, Waltham, Mass., reported inventories at particularly low levels in California, in turn driving up home prices well above a median of $1 million in San Jose, San Francisco and San Rafael. Pro Teck reported 32 metros with housing inventories of less than three months. The good news: that is down from 49 last year.

Mark Fleming, Chief Economist with First American Financial Corp., Santa Ana, Calif., noted housing completions decreased 3.9 percent in November from a year ago and continue to fall short of the number of new housing units necessary to keep pace with household formation. Housing starts also decreased 3.6 percent in November compared with a year ago. Single-family starts declined 13.1 percent compared with last November.

“Looking ahead to 2019, single-family homebuilding will need to increase to keep pace with rising demand from the largest generation, millennials, as they enter their prime home-buying years,” Fleming said.