Inventory Constraints Driving Up Home Prices

Low housing inventory driving up home prices

By Sam Khater Housing Affordability, Real Estate

Months' Supply of Homes for Sale

We recently took a look at how low available inventory is contributing to rising home prices. As you can see from the following NAR chart, for sale inventory is at its lowest level since 2005 at approximately 4-months’ supply compared to a “normal” market of 6-months’ supply.

We found that unsold inventory is even lower than traditional metrics might suggest. Because the bulk of entry-level supply, especially first-time homebuyers, is so constrained, it’s effectively keeping potential buyers out of the market. The below chart illustrates the low price tier pressure.  These price tier are based on median price, which means 100 is the median, 125 is 25% above the median, etc. The highlighted area shows that the “affordable” price tier’s inventory is shrinking and now represents less than 3-months’ supply of homes for sale.

Months Supply by Price Tier

When the housing market faces lower inventories, it has a mirror effect in speeding up the velocity or lowering days on the market. The following chart shows the increase in the percentage of homes sold in less than 30 days- 17% of homes sold in less than 30 days, an all-time high since we’ve been tracking this metric. It also demonstrates another dramatic shift on the other end of the spectrum, unsold homes on the market over 180 days. This has dropped to an all-time low and 50% down from the level during the mortgage and housing crisis.

Velocity of Sales is High and Less Desirable Inventory is Rapidly Declining

Not surprisingly, the price pressure that results from this market velocity has had a direct impact on listing vs. sold prices. The smaller the inventory, the more impact on driving selling prices up. This lack of supply is disproportionately driving up low-end home prices. We compared low-end to high tier prices for the top 20 markets and found that the low tier’s lack of inventory, and the borrowers competing for those homes, is outpacing price growth for high tier properties.

In our next blog, we’ll take a closer look at how these market forces are impacting rental prices.

Top 20 Market Year-over-Year Percent Change in August 2017

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