Lack of inventory, not higher interest rates or the weather, is inhibiting sales.
Reports from around the country indicate two things. First, pending sales are down in most markets from a year ago, not just slightly but measurably. Second, inventories continue to be extraordinarily tight in a majority of markets. From most accounts, pending sales are down due, in large part, to the lack of inventory. There is a feeling among realty leaders that many sellers are reluctant to sell their homes when they cannot find what they are looking for in a replacement residence.
Homebuilding
There are several headwinds facing inventory. Homebuilding remains well below a level that would satisfy demand, particularly at the entry price point. Due to credit conditions and pricing, homebuilders are going to start less than 1 million units this year, and two thirds will be single family. A more normal mix from the past is 86 to 87 percent of all starts being of the single-family variety. Don’t look for homebuilding to add to inventory in most markets in any major way.
Affordability
At the entry point, affordability issues in some big markets are weighing heavily against first-time homebuyers as well as competition from all cash investors. In California, for instance, (the nation’s largest housing market) only 32 percent of families can afford the median-priced home in the state, down from 56 percent just two years ago. Without a vigorous first-time homebuyer market, the move up market is impacted—not just in the short run, but over the longer term.
Brokerage firms and sales agents dealt with all kinds of markets in the past 30 years, but none feel or look like this one. Rarely have there been markets where the lack of inventory is causing a slowdown in sales like this one—usually it is high interest rates, high unemployment or a combination of the two. Many surveys show consumers at all levels desire to own their own home. But, scarce inventories and rising prices have not yet produced the normal boom that would be expected. There doesn’t appear to be any short-term fixes on the horizon.
This article appeared in REAL Trends Newsletter and is being reprinted with permission of REAL Trends, Copyright 2014.