While Inventory Drops Nationally, California Bucks the Trend

After some promising signs of progress last quarter, U.S. inventory took a few steps back in Q4, falling year-over-year across all price categories. But in some expensive metros, inventory bucks the trend and is rising at a sometimes rapid clip.

Examining inventory, affordability and price trends over the last year, we found:

• Nationally, total inventory is down 4.6 percent, led by declines in the number of premium homes for sale (-7.8 percent year-over-year). Starter and trade-up inventory are down a relatively tame 2.2 percent and 1.5 percent, respectively.
• Some of the priciest metros continue to buck the national trend, leading the surge in inventory. Since the fourth quarter of last year, San Jose, Calif. added 66.6 percent more listings, Salt Lake City added 45.3 percent, and San Francisco added 36.5 percent.
• Starter and trade-up home inventory are growing faster (admittedly from very low levels) than premium in many expensive metros, offering buyers a much-needed infusion of even somewhat more-affordable homes to choose from. In San Jose, the number of starter homes on the market almost doubled (up 91.4 percent) compared to last year.
• Nationally, prices across all categories continue to climb. Starter home prices rose the fastest, up 13.9 percent over the last year, and price growth in this segment has been accelerating for three straight quarters. This rapid price growth has put starter homes increasingly out of reach for many homebuyers as affordability suffers – a typical starter-home buyer should expect to pay 41 percent of her income on a monthly mortgage payment, up from 34.2 percent a year ago.

This refrain should sound familiar. Housing inventory has fallen for nine consecutive quarters, and was down by 4.6 percent in Q4. The last time nationwide inventory grew was in the third quarter of 2016, and even then it only rose a scant 0.1 percent.

The overall inventory decline was driven largely by fewer premium homes being listed for sale. Listings for homes in the highest price category fell 7.8 percent year-over-year, overshadowing the relatively tepid falls in starter and trade-up homes — down 2.2 percent and 1.5 percent, respectively. After the double-digit tumbles beginning in the latter half of 2017 and continuing into this year, these smaller dips offer hope that starter and trade-up inventory is stabilizing.

But real estate is local, and despite declining national inventory, the number of homes for sale is on the rise – especially in some of the nation’s most unaffordable markets. Pricey California represented six of the top 10 metros with the largest annual inventory gains, and all six of these California metros are also among the 10 most expensive housing markets in the nation. Beyond California, Seattle also makes its mark as one of the priciest metros adding the most inventory.

In all these metros but New York, starter or trade-up inventory is growing faster than premium. That’s good news for homebuyers looking at these lower price points, many of whom have been hit the hardest by rising prices and low inventory.

Still, U.S. inventory overall remains incredibly depressed relative to the early years of the housing recovery. Total inventory is still about a quarter lower (24 percent) compared to five years ago. And the laws of supply and demand have consequences – when supply is tight and demand is high, prices tend to rise more quickly. And that’s exactly what we’re seeing.

Despite some turnaround in inventory trends, home prices are continuing their upward climb, far outpacing income growth. Starter home prices are—yet again — rising the fastest. Listing prices for starter homes grew 13.9 percent over the last year, compared to 8.9 percent growth in trade-up homes, and 5.7 percent for premium. After slowing for the last few quarters, growth has re-accelerated to rates last seen in late 2016 to mid-2017.

Rising prices leads to a continued erosion in home affordability, especially for starter homebuyers. Households in the starter segment – those with incomes in the bottom-third of the metro – hunting for an entry-level home can expect to fork over 41.0 percent of their income on their mortgage. That’s up 6.8 percentage points from last year—the largest increase across all three segments.

The general rule of thumb says that housing costs should not exceed 30 percent of household income. But out of the 100 largest metros nationwide, only 26 have starter homes that are likely to cost less than 30 percent of household income. And in no metro did affordability, at any price tier, improve over the last year.

And affordability is worsening the most in the nation’s most expensive metros. The five metros with the highest listing prices were all among the top 10 metros where the share of income required to purchase a starter home increased the most. And invariably across these metros, starter home affordability worsened by a greater margin than higher-priced segments.

In San Jose, San Francisco and Los Angeles potential buyers earning an income in the bottom-third of all local incomes realistically cannot afford to buy even an entry-level home. These buyers would theoretically need to spend all of their income, and then some, just to afford their mortgage – let alone all of life’s essentials… like food. For these buyers to actually afford even an entry-level home, they’d need to take on a second or third job, and/or pool resources with one or more additional buyers – which can add complexity to a transaction.

What’s more likely in these areas is that even middle or higher-income buyers are being forced to consider homes that may have traditionally been considered starter homes. This increases competition in this segment, which pushes prices up, further handicapping lower-income buyers.

Each quarter Trulia’s Inventory and Price Watch provides three metrics: (1) the number and share of inventory that are starter homes, trade-up homes, and premium homes, (2) the change in share and number of these homes, and (3) the affordability of those homes for each type of buyer.

We define the price cutoffs of each segment based on home value estimates of the entire housing stock, not listing price. For example, we estimate the value of each single-family home and condo and divide these estimates into three groups: the lower third we classify as starter homes, the middle third as trade-up homes, and the upper third as premium homes. We classify a listing as a starter home on the market if its listing price falls below the price cutoff between starter and trade-up homes. This is a subtle but important difference between our inventory report price points and others. This is because the mix of homes on the market can change over time, and can cause large swings in the price points used to define each segment. For example, if premium homes comprise a relatively large share of homes for sale, it can make the lower third of listings look like they’ve become more expensive when in fact prices in the lower third of the housing stock are unchanged.

For our inventory metrics, we count the number of unique listings in each price tier throughout the course of a month. Note that in previous reports, our inventory metric was median daily inventory. We’ve replaced this daily measure with monthly counts because it is less sensitive to demand in volatile markets.

Price is now based on the median listing price of every active for sale listing throughout the month and are not comparable with previous quarters’ metrics. We measure affordability as the share of income needed to purchase the median-priced home, assuming a 20% down payment and the average 30-year fixed mortgage rate in each quarter as quoted by Freddie Mac in the Primary Mortgage Market Survey (PMMS). Household incomes are calculated using 1-Year American Community Survey (ACS) microdata. We adjust the 2016 income data to the current period using the Employment Cost Index. We divide incomes into terciles, and take the median in each tercile to create three income levels corresponding to the three tiers of listing prices. The affordability of starter homes is calculated using the bottom-third of incomes, trade-up is calculated using the middle-third, and premium is calculated using the top-third.