Affordability

No Inventory, No Problem: Why Supply Doesn’t Always Matter

By Ralph McLaughlin | June 21, 2016
It’s well known that inventory of homes has fallen steadily over the past few years. For starter homebuyers though, falling inventory isn’t always bad – in many markets, demand for starter homes is falling, and so are prices.

San Francisco Bay Area

America has experienced a dramatic drop in inventory over the past four years, with starter and tradeup homes taking the biggest hit. In most markets, this drop is making homes more expensive and less affordable. However, low inventory need not always lead to a housing shortage and higher prices. After all, prices are determined by both supply and demand. It turns out, there are several markets – such as Columbia and Charleston, S.C., ­– where buyers for homes have dropped at a greater pace than the inventory. In this quarter’s Inventory and Price Watch, we take a look at these and other markets where falling supply has actually occurred at a time of waning demand.

Compared to other inventory reports, the Trulia Inventory and Price Watch offers homebuyers and sellers deeper insight into the supply and affordability of homes within different segments: starter homes, trade-up homes, and premium homes. Segmentation is important because home seekers need information not just about total inventory, but also about inventory in the segment they are interested in buying. For example, changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with starter homes.

Looking at all the housing stock nationally and in the 100 largest U.S. metros from April 1, 2015 to April 1, 2016, we found:

  • The number of starter and trade-up homes continues to drop at double-digit rates annually, but just less 0.2% for premium homes;
  • A lack of starter home affordability is becoming problematic in places outside of California. Starter home buyers in Oakland, Calif. need to spend about 8% more of their income to buy a home this year, but buyers in Denver, Portland, Seattle, and central Florida and starting to feel the same pinch;
  • Falling starter home inventory isn’t wreaking havoc everywhere: in 20 of the 74 metros where starter home inventory has fallen, waning demand has offset tightened supply, so prices have fallen.

 

No Spring Forward: National Home Inventory Down More Than 6% Year-Over-Year

This spring house-hunting season brought no relief for homebuyers, as inventory of all homes has dropped nationally by about 6% over the past year. In addition:

  • The number of starter homes on the market dropped by 12.3%, while the share of starter homes dropped from 25.6% to 23.9%. Starter homebuyers today will need to shell out 1.3% more of their income towards a home purchase than last year;
  • The number of trade-up homes on the market decreased by 11.5%, while the share of trade-up homes dropped from 26.3% to 24.8%. Trade-up homebuyers today will need to pay 0.8% more of their income for a home than last year;

The number of premium homes on the market decreased by just 0.2%, while the share of premium homes increased from 48.2% to 51.3%. Premium homebuyers today will need to spend 0.5% more of their income for a home than last year.

2016 Q2 Inventory
Housing Segment Median List Price Share Inventory % of Income Needed to Buy Median Price Home In Segment
Among the 100 largest U.S. metro areas. Share is the percent of for-sale homes that fall into each segment, which is defined separately for each metro. Median price for each segment is the stock-weighted average of the median price of each segment in each metro. Some point change estimates may be slightly different than stated values because our differing procedure occurs before rounding.
Starter $157,072 23.9% 244,080 37.5%
Trade-Up $275,262 24.8% 253,192 25.0%
Premium $585,334 51.3% 523,655 13.7%
Change Q2 2015 to Q2 2016
Housing Segment % Change In Median List Price Percentage Point Change in Percentage-Point Change in Share  % Change in Inventory Percentage Pt. Change in Percentage-Point Change in Share of Income
Among the 100 largest U.S. metro areas. Share is the percent of for-sale homes that fall into each segment, which is defined separately for each metro. Median price for each segment is the stock-weighted average of the median price of each segment in each metro. Some point change estimates may be slightly different than stated values because our differing procedure occurs before rounding.
Starter 6.4% -1.7 pts -12.3% 1.3 pts
Trade-Up 5.9% -1.5 pts -11.5% 0.8 pts
Premium 7.9% 3.1 pts -0.2% 0.5 pts

Decreased inventory continues to take a toll on the affordability of all home segments, but especially starter homes. Starter homebuyers have been hit the hardest, and would need to dedicate 37.5% of their monthly income to buy a starter home – a 1.3 point increase from last year. Trade-up and premium home buyers haven’t been hit as hard, but still need to spend 0.8% and 0.5% more of their income to buy a home, respectively.

2016 Q2 Inventory
Housing Segment Median List Price Share Inventory % of Income Needed to Buy Median Price Home In Segment
Among the 100 largest U.S. metro areas. Share is the percent of for-sale homes that fall into each segment, which is defined separately for each metro. Median price for each segment is the stock-weighted average of the median price of each segment in each metro. Some point change estimates may be slightly different than stated values because our differing procedure occurs before rounding.
Starter $157,072 23.9% 244,080 37.5%
Trade-Up $275,262 24.8% 253,192 25.0%
Premium $585,334 51.3% 523,655 13.7%
Change Q2 2015 to Q2 2016
Housing Segment % Change In Median List Price Percentage Point Change in Percentage-Point Change in Share  % Change in Inventory Percentage Pt. Change in Percentage-Point Change in Share of Income
Among the 100 largest U.S. metro areas. Share is the percent of for-sale homes that fall into each segment, which is defined separately for each metro. Median price for each segment is the stock-weighted average of the median price of each segment in each metro. Some point change estimates may be slightly different than stated values because our differing procedure occurs before rounding.
Starter 6.4% -1.7 pts -12.3% 1.3 pts
Trade-Up 5.9% -1.5 pts -11.5% 0.8 pts
Premium 7.9% 3.1 pts -0.2% 0.5 pts

Decreased inventory continues to take a toll on the affordability of all home segments, but especially starter homes. Starter homebuyers have been hit the hardest, and would need to dedicate 37.5% of their monthly income to buy a starter home – a 1.3 point increase from last year. Trade-up and premium home buyers haven’t been hit as hard, but still need to spend 0.8% and 0.5% more of their income to buy a home, respectively.

Starter Home Unaffordability Spreading Beyond California

In our last report, we found that nine of the 10 metros experiencing the largest drop in starter home affordability over the past four years were located in California. However, only four of the 10 metros experiencing the largest drop in starter home affordability over the past year were located in California. While Oakland, Calif. still tops the list with starter homebuyers needing spend 8.3% more of their income on a starter home compared to last year, starter homebuyers in the Mountain West, Pacific Northwest, and Gulf Coast of Florida are beginning to feel the pinch. For example, starter home buyers in Denver need to spend 8.1% more of their income to buy a home this year, 6.1% and 5.2% more in Seattle and Portland, and 5.5% and 4.8% more in Cape Coral, Fla., and Sarasota, Fla.

Denver

Seattle

No Inventory, No Problem

One might think that falling starter home inventory over the past year would cause starter home prices to rise, and for the most part, that’s what has happened in most markets. In places like Portland, Dallas, and Colorado Springs, Colo., large decreases in starter home inventory has led to double-digit increases in starter home prices. However, price movements aren’t just determined by changes in supply (inventory) – they’re also affected by the number of homebuyers actively bidding on homes. In fact, in 20 of the 74 markets where starter inventory has dropped, demand has fallen at faster pace and so prices have fallen.

For example, starter home inventory has fallen by about 20% of the past year in both Columbia, S.C., and Charleston, S.C., but starter home prices have actually fallen in these markets by 0.8% and 5%, respectively. And these two cities aren’t outliers – 18 others large metros that have experienced a drop in inventory have also seen price drops, including New York, Kansas City, and Montgomery County-Bucks County-Chester County, Pa.

Central Florida

South Carolina

Markets Where Falling Inventory Doesn’t Matter

U.S. Metro Starter Home Inventory, 2015 Q2 Starter Home Inventory, 2016 Q2 % Change in Starter Home Inventory, 2015-2016 % Change in Starter Home Prices, 2015-2016
Columbia, SC 930 724 -22.2% -0.9%
Charleston, SC 565 447 -21.0% -5.1%
Kansas City, MO 1,927 1,530 -20.6% -0.1%
Hartford, CT 1,626 1,318 -18.9% -0.2%
New Haven, CT 1,222 995 -18.6% -0.3%
Madison, WI 1,169 952 -18.6% -0.8%
Montgomery County-Bucks County-Chester County, PA 2,418 2,005 -17.1% -0.5%
New York, NY 12,105 10,315 -14.8% -0.7%
Louisville, KY 1,116 952 -14.7% -4.3%
Richmond, VA 931 797 -14.4% -4.1%
NOTE: Among the 100 largest U.S. metro areas.

On the other hand, falling inventory of tradeup and premium homes is occurring in metros where demand for such homes have not. Of the 78 markets where tradeup home inventory has fallen over the past year, only five markets have witnessed a drop in prices. Similarly, of the 70 markets where the number of premium homes have dropped, only one – Syracuse, N.Y., – has seen a decrease in premium home prices. This is stark contrast to the 20 of 74 markets where drops in starter home inventory have occurred at a time when demand has also declined. The takeaway here is that falling inventory has been relatively more problematic for tradeup and premium home buyers over the past year, even though inventory of starter homes has dropped most.