012 Housing Stock Woefully Undersupplied, Affordability Diminishing

Inventory Low Especially at Lower End of Market

Another indicator of the lack of inventory is the amount as measured by months of supply.  This is a metric used that projects the amount of time it would take for all existing homes on the market to be sold out if no other homes were put on the market.  As of syndication of this episode [Q1 2017], supply is around 4 months where historically it is more common to see 7-8 months i.e. supply is running at half what it would be excepted to be.  This is a particularly acute problem at the bottom of the market.   If you break that out by price levels, you see that below $500,000 price level, supply is at 3-3.5 months, whereas for properties selling at above $1MM, supply is much higher at around 11 months.  What this means is that at the lower, entry level end of the market, the demand is extremely high, and supply very low.  Sales in the below $500,000 level are down over 20% and over since last year – simply because the supply is not there.

Demographics a Significant Factor

Demographics is a huge part of the problem.  Historically, we have seen turnover at around 8% i.e. of the total housing stock, 8% will sell in any given year, but that is currently around 4.2% - half what it used to be.  Many long term homeowners, with over 70% of all homeowners 55 years old and above, have not moved home for almost 20 years.  For the first time in 30 years of conducting research on how long people own a home before selling, C.A.R. discovered that the average time homeowners stay in a home is over 10 years – instead of the 5 years as it used to be.  Baby-boomers do not want to move on even though they are living in homes that are too large for them.  Interest rates are at an all time low, pretty much, so most folk who can, have refinanced so the prospect of moving – and taking on higher rate debt – is not so attractive.

Tax Policy Contributes to Inventory Restraints

Governmental policy and structural challenges that incentivize people to stay in their homes also play a role in squeezing down inventory.  The Prop 13 factor (tax) dis-incentivizes homeowners from selling.  Prop 13 restricts property taxes to a set percentage of the last sale price, plus a maximum 2% increase per year.  With property prices rising as much as they have, there has been a de-coupling between home values and property taxes.  This means that moving to a new home at a much higher price (even if the prior home can be sold for far more than the original price and for the same as the purchase price of the new home), results in a dramatic increase in property tax liability as the basis has now increased to market value.  Thus the incentive is to stay in your home rather than move.  So the trend has been to pump money into existing homes with remodeling work, rather than to move to a new, perhaps smaller, home.  All indications is that low turnover and tight inventories are, perhaps, here to stay, at least for the foreseeable future.