The housing shortage may be turning, warning of a price bubble
- The supply of homes for sale in the second quarter of this year, the all-important spring market, rose at three times the rate of last year, according to Trulia
- The supply of homes for sale is still down 5.3 percent compared to a year ago.
- Historically, prices lag sales by a few months, and sales have been slowing this year in most major markets.
The most competitive, tightest housing market in decades may finally be loosening its grip, and that could put pressure on overheated home prices. The supply of homes for sale in the second quarter of 2018, the all-important spring market, rose at three times the rate of the same period in 2017, according to Trulia, a real estate listing and research company.
The inventory jump was the largest quarterly improvement in three years and could be signaling a slight thaw in today’s housing market. But it is just a start.
“This seasonal inventory jump wasn’t enough to offset the historical year-over-year downward trend that has continued over 14 consecutive quarters,” according to Alexandra Lee, a housing data analyst for Trulia's economics research team.
The supply of homes for sale is still down 5.3 percent compared with a year ago. Still, all real estate is local, and some markets are seeing greater relief. Thirty of the nation’s 100 largest cities, including New York City, Miami and Los Angeles, now have more supply than a year ago.
Vicious circle
Of course, the increase is a double-edged sword. Supplies are increasing because sales are slowing, and sales are slowing because prices are so high. In New York City, the median household must spend 65 percent of its income to buy a home, according to Trulia. In Los Angeles, it takes 59 percent.
“Among these unaffordable metros, San Diego posted the largest inventory growth—22 percent year-over-year,” wrote Lee. “Compare that with the same quarter last year, when that Southern California metro registered a 28 percent inventory decrease.”
Historically, prices lag sales by a few months, and sales have been slowing this year in most major markets. This housing cycle, however, has so far been unique. The drop in sales is due to the tight supply, and that just pushes prices higher. The tight supply is due to very high demand and still below-normal construction, as the market continues to recover from the worst housing crash in history almost a decade ago.
Home sales in Southern California fell in May by 3.4 percent annually, according to CoreLogic, but the median price of a home sold in May was up more than 8 percent to a record $530,000. This even with the slightly increased inventory.
“With inventory tight and affordability worsening, the number of Southern California homes sold has fallen on a year-over-year basis during three of the last five months,” said Andrew LePage, a CoreLogic analyst. “Total sales during the first five months of this year fell about 2 percent from the same period last year, reflecting limited inventory particularly in more affordable price ranges.”
Charlotte buyers' challenge
The disparity is even more striking in Charlotte, North Carolina, a very hot market fueled by big job growth and an influx of retiring baby boomers. Home sales fell nearly 12 percent in June annually but the median price of a home sold was still nearly 3 percent higher, according to the Charlotte Regional Realtor Association. Homes were also selling, on average, eight days faster than a year ago.
“Even though the Charlotte region is wedged into a solid seller’s market, incredibly low supply coupled with higher prices and rising mortgage rates are presenting challenges to buyers,” wrote 2018 Charlotte Regional Realtor Association/CarolinaMLS President Jason Gentry in a release. “However, home sales are still occurring across the region, as buyers continue to seek homes outside Charlotte’s city limits.”
Inventory in Charlotte did rise 1 percent compared with a year ago, but supplies are still quite low.
While homebuilders are slowly ramping up production, they are doing so largely in the move-up and luxury market. Sales of newly built homes have been rising in Southern California, easing the inventory shortage somewhat, but not enough.
“New-home sales continue to run well below historically normal levels, with the sales through May of this year 37 percent below the average number sold during that five-month period over the past three decades,” noted LePage. “Also, most of the new homes sold this year were aimed at mid-market to high-end buyers, with almost two-thirds selling for $500,000 or more and 15 percent selling for less than $400,000.”
Mortgage applications to purchase a newly built home plummeted nearly 9 percent in June compared with June 2017, according to the Mortgage Bankers Association. This suggests lower new home sales going forward, despite higher prices.