At the National Association of Real Estate Editors Conference (NAREE) in Denver this month “The housing shortage: dealing with barren inventory” was presented. The panel presenting included Thomas O’Grady, Pro Teck Valuation Services; Aaron Terrazas, Zillow; and Javier Vivas, realtor.com. Here is a snapshot of what was covered.
According to the panel we have had 23 months of historic low home sales. With 200K fewer homes for sale, and 150K of the homes being in the mid- to low-tier. We are losing inventory at record pace and in a segment where we are seeing the most demand – in the entry-level buyer. The shortage is national, and in smaller square footage homes.
When looking at the inventory shortage, there are two factors to consider:
- Homes hitting the market are selling fast.
- There are not enough homes entering the market.
What’s causing the inventory shortage?
- New construction has lagged among existing home sales. Homebuilders are not building at the levels they were.
- Homeowners have negative equity in some markets.
- There is a shift of owner occupied stock to rented occupied stock with 6.3 million more renter-occupied.
- The power of psychology. There is a psychology of market for seller; they are holding on to homes to see what kind of gains they can get.
The homebuilder blame game
Homebuilders are getting a lot of the blame, particularly for affordable homes. 24% of all home building costs is put towards regulations – making it expensive for builders to build. And, there is a ack of labor and a high cost of acquiring land. Smaller builders are also having issues will accessing financing.
It’s hard to move up in a rising market
People aren’t selling because they cannot replace what they have. Buying up is becoming out of people’s grasp in some markets. There is a fear that I can’t put my house in market because I won’t be able to find anything to buy. This is the inverse of what we had in the boom. Appreciation and run upon price is going to hit into affordability, and as always, people want to get a deal.
A rise in home equity
In appreciating markets where the homeowners have equity and a low interest rate, we are seeing homeowners tap into equity and make home improvements versus putting their homes on the market. 40% of home owners have more than 20% equity. And to further support this, people are staying in homes for 10 years which is an all-time high. This stat used to be only 6 years.
Homeowners in love with their loans
Many homeowners are locked in by their super affordable mortgage rate. REALTORS® are starting to say that they have more people in love with their loan than with their home. Many homeowners do not want hassle with competitive market.
Investors are staying in the market
Investors propped up the market by buying homes in the crash. People thought they would sell them but they have been making so much money that they aren’t selling. Rental securitizations are bringing a lot of liquidation. We are seeing this more in urban areas.
Seasonal adjustment disorder
Spring buying season started in the winter this year. This is a very big trend this year. Spring home buying season started 3 weeks earlier based on online activity and market velocity. We typically see a spike in online activity in January. This year we saw a peak at the second week of January. This is important because we saw buyers earlier. 1 in 4 homes are selling in less than a month – typically the housing market hits that in March, but this year we hit it in January. And, some of this seasonal adjustment disorder is attributable to the shift in the population demographics. Younger buyers are not held to seasonality and schools.
The urbanization of employment
Job growth – employment growth over past decade has been concentrated in urban areas. There is an employment drive in a lot of markets. The panel called this the Urbanization of employment – creating white collar jobs.
Creating “gray space”
We are seeing people moving further out and now seeing commuting as a more viable solution for home ownership. A good example of this is people moving from San Francisco to Antioch.
In Nashville the population grew by 10%, but housing stopped and home prices went up. People can’t afford to live there anymore. The Mayor is trying to put housing along transit roots to make more affordable home options.
There is an urban, suburban myth. Will urban searchers ever compromise on their urban dream, or will they move to the “gray space”? These are the “gray spaces” between urban and suburban popping up and picking up in demand. The future of housing could be the Long Island’s of the U.S.
Building wealth and potentially frustration
There is a shadow buyer demand – a lot of renters who got in their rental really wanted to buy. They had no other option and needed the extra space. People want the white picket fence, and are almost frustrated that they cannot get it.
Boomers have preached that the best way for middle class to build wealth is through home ownership. Buyers not yet on the market are asking themselves, “Will I have less wealth because I entered the market later in life compared to the baby boomer?” There is a common legacy of thinking that owning a house is a big deal, and we will see frustration around this.
It is getting harder to get into the market. Many potential homebuyers know that the longer they wait the harder it will be to get into the housing market. The market at the entry level is very competitive. The high end the market is slowing down a bit.
All of this will resolve itself through natural evolutions. LA was a low-cost alternative to NY. And now, Dallas is a low cost alternative to LA.
Ways of adapting to the shortage
- Seeing more multigenerational, joint home investments.
- The spillover effect – people will move further out and commute longer.
- Mermaid effect – people are falling in love with their 2nd and 3rd home choices.
- Macroeconomic play in effect that will make us have to wait it out.
- Only feasible relief is through the homebuilders.
Despite all of this according to the panel, the U.S. real estate is one of the most attractive asset classes.
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