The Inventory Crisis: No End in Sight, Housing Inventory Keeps Shrinking (December 2017 Market Report)

22 January 2018

The Inventory Crisis: No End in Sight, Housing Inventory Keeps Shrinking (December 2017 Market Report)

RIS Media

22 January 2018

  • For-sale inventory across the country is down 10 percent since last December and has been falling on an annual basis for the past 35 months.
  • National home values rose 6.5 percent over the past year to a median home value of $206,300. Home values in San Jose, Las Vegas, and Seattle rose the most.
  • Median rent in the U.S. rose 2.6 percent over the past year, the fastest pace of appreciation since June 2016. The fastest appreciating rental markets are along the West Coast.

Buyers are being challenged by diminished inventory and mounting prices, especially in areas with crisis-level supply, according to the December Zillow® Real Estate Market Report, as shown below. Inventory is down 10 percent from last year—a three-year trend—and, in the buzziest markets, as much as 40 percent.

Construction costs are exacerbating the issue, says Aaron Terrazas, senior economist at Zillow, who anticipates building will be concentrated in outlying suburbs this year.

“On the supply side, the market is starving for new homes, but it won’t be easy for builders struggling with high and rising land, labor and lumber costs,” Terrazas says. “Aging millennials and young families may be able to find more affordable new homes for sale this year, but they’ll most likely be in further-flung suburbs with more grueling commutes to urban job centers.”

Few homes are moving prices up—6.5 percent in the past year, to a median $206,300, according to the Zillow Home Value Index (ZHVI). Appreciation has been highest in San Jose, Calif., at 21.2 percent (a median $1,171,800), causing inventory to shrink 40.6 percent. In the largest metros:


Markedly, a mere 16.7 percent of analysts cited in Zillow’s 2017 Q4 Home Price Expectations Survey forecast home-building will pick up this year. In December, ground-breaking on new homes underwhelmed; builders, however, are confident in their prospects this year, according to the National Association of Home Builders (NAHB).

Changes to the expected could come when the Tax Cuts and Jobs Act goes into effect, says Terrazas.

“Tight inventory fueled by a tight labor market and low interest rates propelled home values to record heights in 2017, but the outlook is now much less certain,” Terrazas says. “Tax reform will put more money in the pocket of the typical buyer, but will limit some housing-specific deductions. Overall, this should increase demand for the most affordable homes and ease competition somewhat in the priciest market segments.”

December Zillow® Real Estate Market Report

December marked the 35th straight month of falling year-over-year inventory, a three-year streak unlikely to break in 2018. Which means the often heated competition among home buyers and sometimes rapid increases in home values that tend to follow are unlikely to change this year, either.

The number of homes listed for sale on Zillow last month fell 10 percent compared to December 2016, according to the December Zillow Real Estate Market Report. Inventory fell year-over-year in 26 of the country’s 35 largest metro areas, and was down by more than 20 percent year-over-year in nine of those markets. In San Jose, the heart of red-hot Silicon Valley, inventory was down a whopping 40.6 percent year-over-year, by far the largest annual decline among the largest metros (inventory was up 17.9 percent from November in San Jose).

And even in areas where inventory is growing, that’s largely because it’s up from near rock-bottom levels. Inventory in the Washington, D.C., metro was up 19 percent year-over-year in December, the biggest annual gain among the 35 largest markets. But that gain is muted somewhat when considering it is only the second month of annual inventory increases in a row, after 20 straight months of inventory declines in and around the nation’s capital. Inventory in the Dallas region was up 15.6 percent in December compared to a year ago, and has gone up year-over-year in every month since February. But prior to this modest rebound, Dallas inventory had been falling on an annual basis for 66 straight months – 11 months of gains pales in comparison to five-plus years of often double-digit declines.

And while the inventory crisis is widespread, certain segments are feeling the pinch more than others. Nationwide, inventory of homes in the bottom third of home values – the kinds of modest, more entry-level homes typically sought by first-time buyers and young families – was down 17.7 percent in December compared to a year ago. Inventory of top-third homes more likely to be purchased by more established move-up buyers was down just 4.9 percent over the same period. And those more affluent home shoppers looking in the upper range have more homes to choose from to begin with: More than half (51.3 percent) of homes available for sale on Zillow in December were in the top-third of all homes, compared to just 22.1 percent in the bottom-third.

This limited and dwindling supply, coupled with high demand from home buyers driven by a good economy – especially younger buyers just aging into their prime home buying years and looking to start families – means home values themselves continue to soar. The national median home value rose to a Zillow Home Value Index of $206,300 in December, up 6.5 percent year over year and the 65th straight month of annual home value growth. Median home values grew year-over-year in all 35 of the nation’s largest markets, with the fastest growth in San Jose (up 21.2 percent year-over-year), Las Vegas (14.3 percent) and Seattle (12.5 percent). Large metros with the slowest annual growth were St. Louis (1.2 percent), Washington, D.C. (1.6 percent), and Baltimore (1.7 percent).

And costs aren’t just rising for home buyers. Median rent across the nation rose 2.6 percent since last December, the fastest pace of appreciation since June 2016, to a median payment of $1,439 per month. Sacramento, Calif., Riverside, Calif., and Seattle reported the greatest rent growth over the past year. In Sacramento, rents rose almost 8 percent to a Zillow Rent Index of $1,838. It was the fifth consecutive month that Sacramento rents have led the nation, having displaced Seattle for the top spot in August. Median rent in Riverside rose 6 percent over the past year, and in Seattle, rents rose 5 percent.

Inventory will remain a major concern in 2018, continuing to play a significant role in pushing up prices. It will create particularly strong headwinds for first-time home buyers, who don’t have the benefit of profits from a prior home sale to boost their down payments and make them more competitive. Just 6.3 percent of experts in a recent Zillow survey of more than 100 economists said the inventory situation was the major real estate trend most likely to change significantly this year.

Looking farther ahead, it will be fascinating to see the extent to which tax reform impacts builder behavior and their contributions to alleviating the ongoing inventory situation. Whether they use any tax savings to expand production, build at lower price points and/or hire more workers will go a long way in determining how the housing market shakes out this year and beyond. The market is starving for relatively affordable new homes, and builders cannot and will not ignore this hungry market. Still, it won’t be easy for builders rocked by difficult market conditions. Land, labor and lumber prices are only expected to keep rising, which will force those builders looking to meet market demand to search for less expensive development options farther away from urban job cores. In 2018, aging millennials and young families may be able to find more affordable new homes for sale, but they’ll most likely be in farther-flung suburbs that so far haven’t proven especially attractive to picky younger buyers.