There are three main price-range segments — starter homes (lowest price range), trade-up homes (middle price range), and premium homes (highest price range) — and homebuyers are mainly interested in homes within their particular segment. For example, if you’re in the market for your first home, you probably don’t care too much about what the market is like for premium homes; you’re quite likely focused on those starter homes.
Trulia’s research shows that in 2016, starter homes saw the biggest decrease in inventory of all homes on the market, dropping by 10.7% from 2015. Trade-up homes dropped almost as much, 9.2%, for that same period. Premium homes dropped as well, but only by 3.6%. Low inventory often contributes to whether we have a buyer’s or seller’s market. The Denver, CO, market provides a good example. “There was bifurcation in the market for homes less than $600,000 and more than $700,000,” says Denver agent Matt Vos. “For homes below $600,000, it was definitely a seller’s market. For homes more than $700,000, it was more of a buyer’s market.”
The group most affected by lower inventory in 2016? First-time homebuyers. They paid 1.7% more for a home than they paid in 2015. Because this group paid more, a larger portion of their income went to housing. And that put first-time buyers close to (or over) the 36% debt-to-income limit many mortgage lenders allow.
“The low inventory made transactions much harder to accomplish,” says Vos. He found that buyers often needed to put intangibles in their offers to get deals done, such as offering to pay with cash, closing quickly, waiving the inspection or appraisal, or including a heartfelt letter.
2. Where did starter homes inventory decrease the most?
Although 2016 was a difficult year overall for buyers to find starter and trade-up homes for sale, some areas had bigger decreases in starter homes on the market than others. Leading the pack was Salt Lake City, UT, which saw an 87.9% decrease in starter homes from the period between 2012 and 2016, according to a Trulia Inventory and Price Watch report. San Antonio, TX, was close behind, with an 86.2% decrease, and Austin, TX, was third, with an 82.9% decrease.
3. Which markets had the most unaffordable starter homes?
Inventory is one factor that affects prices but not the only one. Demand also plays a part. According to the same Trulia report, the most unaffordable starter homes of 2016 were largely in California, which has both low inventory and high demand — contributing to high prices — in many areas. First-time buyers in the metro areas of Los Angeles, Oakland, Orange County, Sacramento, San Francisco, and San Jose used between 23% and 29% more of their income to buy a home in 2016 than they did in 2012. High prices often mean that many people who would have bought a trade-up or even a premium home in other, less expensive markets buy starter homes instead.
4. Did some markets experience an increase in real estate inventory?
Not every market in 2016 followed the national trend of low inventory. Trulia’s research reveals some markets experienced a rise in inventory for the period between the third quarter of 2015 and the third quarter of 2016. Florida had the biggest increases in housing inventory: The Cape Coral-Fort Myers area led the field, at 36.7% more homes for sale. Fort Lauderdale, Miami, and West Palm Beach and also saw housing inventory increase. Several California cities experienced increases in housing inventory as well: Fresno, CA, at a 24.4% increase, topped the list. Bakersfield, San Diego, and San Jose also saw housing inventory increase. Oklahoma City, OK, experienced an inventory increase as well.
5. Why the discrepancy in markets?
Trulia’s analysis shows that the Southwest and Southeast regions have, for the most part, been meeting buyer demand, keeping prices affordable. But the Pacific Northwest and the Northeast haven’t been meeting buyer demand, causing prices to rise. So what’s the reason for this regional difference? In a word: elasticity.
Elasticity (the tendency of housing supply to move up or down in line with price changes) is measured by the gap between home prices and housing stock. For example, Las Vegas, NV, an area with increased housing inventory, is considered to be elastic — it saw a 75.2% increase in home prices over the past 20 years, but also had an 87.8% increase in housing stock over that same period. Compare that with low inventory in San Francisco, an inelastic city, which saw a 290% increase in home prices over the past 20 years with only a 12.3% increase in housing stock.
6. How does demand impact low inventory?
If there’s little demand to buy in any particular area, low inventory doesn’t necessarily mean higher prices. In fact, prices could drop in low-inventory markets if demand drops even more. Trulia’s research uncovered several markets where demand has dropped more than inventory during the period between the second quarter of 2015 and the second quarter of 2016. The two areas with the biggest drops in inventory that also experienced falling prices (for starter homes) were Columbia, SC (with a 22.2% drop in inventory), and Charleston, SC (with a 21% drop in inventory). The two biggest drops in starter home prices where inventory also fell were in Charleston, SC (with a 5.1% drop in home prices), and Louisville, KY (with a 4.3% drop in home prices). Richmond, VA (with a 4.1% drop in home prices), was a close third.