Inventory Improving, Affordability Deteriorating: 2018 Q3 Price and Inventory Report

After years of annual declines, national housing inventory seems close to hitting bottom, declining at its slowest pace in years – and it’s even starting to climb back in a number of large markets.

This is good news for buyers frustrated both by lack of choice and rapidly rising housing costs: More homes for sale will help take some of the heat out of the market, slowing price growth as more supply comes on line to meet demand. But even as supply comes creeping back, housing affordability – measured as the share of a typical home buying household’s income needed to afford an area’s median-valued home – has only gotten worse, especially for entry-level buyers.

Here’s what we found in our latest look at inventory, affordability and price trends:

• The total number of homes available for sale nationwide in Q3 was the highest it’s been so far in 2018. And while U.S. inventory remains lower today than it was a year ago, it fell by just 2.5 percent in Q3 compared to the same time last year, the smallest annual decline in more than three years.
• Nationwide, starter homes continue to be hardest to find, representing just one-fifth (20.9 percent) of available inventory in Q3. But that share, as well as the share of inventory that is mid-level, trade-up homes, has grown modestly over the past year as the share of available inventory that is premium homes has fallen.
• Housing affordability has deteriorated since last year, affecting all housing segments but felt most acutely among starter home buyers. Nationally, a family looking for an entry level U.S. home should expect to spend a quarter of their income (25.6 percent) on a mortgage. And in the some of the country’s biggest markets, it’s especially bad. In San Francisco and San Jose, Calif. starter home buyers will need to spend over 100 percent of their income to afford an entry level home.
• Some of the largest gains in inventory were in the nation’s least affordable markets, especially for starter homes. San Jose, Calif. added 66.9 percent more listings since the third quarter last year, Salt Lake City added 45.0 percent and Seattle 44.3 percent.

Inventory remains historically low, and has been falling for years nationwide and in many large markets. But it appears the receding tide may be on the verge of turning: Total U.S. inventory fell just 2.5 percent year-over-year in Q3, the smallest such decline since the start of 2015. And while there are still less homes available for sale overall, home shoppers in the starter-home and trade-up segments may not notice much difference in selection this year compared to last. Starter inventory fell a scant 0.9 percent year-over-year, and trade-up inventory actually rose 0.6 percent.

Looking at the composition of inventory reveals a fuller picture, and one slightly more favorable for bottom and mid-market buyers. Fully half (50 percent) of all homes available for sale are in the premium segment, but that’s down 1.2 percentage points from a year ago — as the share of available inventory at the high end has fallen, the share of total inventory available in other segments has grown.

!function(e,t,n,s){var i=”InfogramEmbeds”,o=e.getElementsByTagName(t)[0],d=/^http:/.test(e.location)?”http:”:”https:”;if(/^/{2}/.test(s)&&(s=d+s),window[i]&&window[i].initialized)window[i].process&&window[i].process();else if(!e.getElementById(n)){var a=e.createElement(t);a.async=1,a.id=n,a.src=s,o.parentNode.insertBefore(a,o)}}(document,”script”,”infogram-async”,”https://e.infogram.com/js/dist/embed-loader-min.js”);

And while inventory remains down nationwide, it has actually risen – sometimes substantially – in a number of local markets, including some of the nation’s priciest.

Six of the 10 metros with the largest annual inventory boost are in California, where home prices are among the nation’s highest. In fact, five California metros on that same list of markets with the biggest inventory gains — San Jose, San Diego, Ventura County, Oakland, and Orange County — also rank among the 10 most-expensive housing markets. Seattle, the tenth-priciest market, also makes the list of metros experiencing inventory increases, with inventory rising 45 percent from a year ago.

But even as inventory numbers begin to go home buyers’ way, those buyers currently in the market for a home will need to spend more of their income to get it relative to a year ago. Over the past year, home prices have risen much faster than incomes, at the same time as mortgage interest rates – which can help keep monthly payments low even as prices rise – have also risen considerably. This one-two punch of rising purchase and finance costs has put a dent in housing affordability for all buyers, but is being felt most acutely by those in the market for a starter home.

Nationwide, a buyer in the starter segment should expect to pay 25.6 percent of their income toward a mortgage (up 3.3 percentage points from 22.3 percent a year ago), compared to 24.4 percent for move-up buyers (up 2.3 percentage points from a year ago) and just 21 percent for premium buyers (up 1.3 percentage points). Of the 100 largest metros analyzed, San Antonio is the only market where overall affordability improved, with the share of income needed to buy a home falling a scant 0.3 percentage point since last year.

And while most housing experts recommend spending no more than 30 percent of income on housing, starter-home buyers in large markets in particular realistically have little choice with

conditions varying dramatically from market-to-market. In the most extreme example, starter-home buyers in San Francisco and San Jose will need to spend 134.0 percent and 109.9 percent, respectively, of their income on a mortgage — completely out of the realm of possibility for most starter home buyers, unless they take on a second or third job or otherwise boost their income in a big way. At the other end of the spectrum, among markets with the largest share of inventory gains, is Bakersfield, Calif. where starter home buyers should expect to spend just 14.3% of their income on a home.

The national slowdown in inventory declines and inventory recovery in some markets, along with a growing portion of the market made up of starter and trade-up homes, undoubtedly represent welcome news to those frustrated by rising prices and a lack of homes to choose from. Price appreciation is also slowing, which may allow those trying to save a down payment and enter the market in coming months a bit of time to catch up, but those in looking for starter homes in certain markets may not be able to make a foothold any time soon.

But deteriorating affordability continues to plague buyers of all stripes, especially those at the bottom: Starter home affordability is the worst it has been since we began tracking price and inventory at the start of 2012. Nonetheless, those buyers daunted by low inventory and high prices have reason to be cautiously optimistic as parts of the housing market begin to ease.

Each quarter Trulia’s Inventory and Price Watch provides three metrics: (1) the number and share of inventory that are starter homes, trade-up homes, and premium homes, (2) the change in share and number of these homes, and (3) the affordability of those homes for each type of buyer.

We define the price cutoffs of each segment based on home value estimates of the entire housing stock, not listing price. For example, we estimate the value of each single-family home and condo and divide these estimates into three groups: the lower third we classify as starter homes, the middle third as trade-up homes, and the upper third as premium homes. We classify a listing as a starter home on the market if its listing price falls below the price cutoff between starter and trade-up homes. This is a subtle but important difference between our inventory report price points and others. This is because the mix of homes on the market can change over time, and can cause large swings in the price points used to define each segment. For example, if premium homes comprise a relatively large share of homes for sale, it can make the lower third of listings look like they’ve become more expensive when in fact prices in the lower third of the housing stock are unchanged.

For our inventory metrics, we take a snapshot of listings each Wednesday in the middle month of the quarter. Quarterly inventory totals are based on the median of the count each Wednesday. Price is based on the median listing price of every active listing throughout the month. We measure affordability as the share of income needed to purchase the median-priced home, assuming a 20% down payment and the average 30-year fixed mortgage rate in each quarter as quoted by Freddie Mac in the Primary Mortgage Market Survey (PMMS). Household incomes are calculated using 1-Year American Community Survey (ACS) microdata. We adjust the 2016 income data to the current period using the Employment Cost Index.