Behind the headlines proclaiming heather inventory levels, there are good reasons to be concerned that tight inventoiers today might presage price explosions tomorrow, especially in two areas where the real estate economy is vulneratble to bubbles: hot regions that led demand and price increases last year and lower tiered entry level homes popular with new home buyers.
On a national basis, inventory reports as 2014 ended the year were mixed. Zillow reported that the Inventory of for-sale homes was up 12.2 percent year-over-year in December 1/22, For-sale inventory remains 22 percent below its April 2011 peak of almost two million homes for sale. However, in a December 18 blog post, Chief Economist Stan Humphries suggested inventories are stalled and have been drifting downward on a monthly basis for the past two months.
The National Association of Realtors reported the December inventory of existing sales declined, representing only a 4.4-month supply at the current sales pace. A six-month supply would be more typical of a market in balance. Realtor.com’s inventory fell 6 percent below a year ago. At the end of the fourth quarter, there were 1.85 million existing homes available for sale, slightly below the 2.01 million homes for sale during the fourth quarter of 2013. Realtor.com reported its inventory was down in December, decreasing 7.0 percent month over month and 6.0 percent year over year.
Echoes of 2013
Two years ago, a few months before shortages ignited a nationwide price boom, NAR’s December 2012 inventories were just 20,000 listings lower than in Decenter 2014—a difference of only about 1 percent.
“A drop in housing supply in December raises some affordability concerns in the months ahead as minimal selection and the potential for faster price appreciation could offset the demand from buyers encouraged by a stronger economy and sub-4 percent interest rates,” says NAR’s Lawrence Yun.
Winter inventories are lower in markets where demand and price increases were strong in 2014. A robust December sales season helped to deplete inventories in most Texas markets, where housing inventories hit an all-time low of 3.3 months in 2014-Q4, a decrease of 8.33% from one year prior. That figure is nearly half the 6.5 months often cited as a balance between supply and demand. “Texas home sales in the first half of 2015 are expected to be similar to what we’ve seen in 2014, but continued increases in home prices and record-low inventory levels should still continue,” cautioned Jim Gaines the Real Estate Center at Texas A&M University.
California, site of the bubbles in 2013, has the potential to repeat unless inventories replenish quickly.. In the San Francisco Bay Area, which saw run-ups in sales and prices throughout the year, the market has tempered from its earlier frenzied pace mostly due to extremely tight inventory, reports the California Association of Realtors. CAR says Housing inventory tightened in December, with the available supply of existing, single-family detached homes for sale dropping from 4.4 months in November to 3.3 months in December. The index was 3 months in December 2013. The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate. A six- to seven-month supply is considered typical in a normal market.
Slower Markets Look Safer
In Florida, also home to volatile price and inventory fluctuations in recent years, inventories of single-family homes over the final quarter were up 1.2 percent year-over-year, while new townhouse-condo listings remained about the same as last year. Meanwhile, demand in Florida was down. The median number of days it took to sell a single-family home lengthened in December, up from 43.9 days in November to 47.3 days in December and from 40.4 days in December 2013.
In some major markets, winter inventories are more than adequate. In the Mid-Atlantic Region, which includes Baltimore and Washington DC, inventories rose strongly in the second have of 2014, ending 13.2 percent above last year.
In New York State, the months’ supply of inventory dropped 4.7 percent at year’s end to a 8.2 months’ supply. It stood at 8.6 months at the end of 2013. A 6 month to 6.5 month supply is considered to be a balanced market. Inventory stood at 76,682 units at the end of 2014, a decrease of 2.8 percent compared to the end of 2013.
Hotter Markets Low on Low Price Listings
However, demand-driven markets turned the corner in 2014 are reporting tighter inventories this year than last. Denver was down 17.4 peent in December from 12 months ago and Chicago, 21 percent, which is significantly tighter than the rest of Illinois. In December, at the latest average annual pending sales rate, Illinois had enough housing inventory for 4.8 months2 (down from 5.0 months a year ago). In the Chicago PMSA, the comparable figure was 3.5 months (down from 3.6 months a year ago).
In Chicago, months of supply are increasing for homes in all price ranges above $200K and decreasing for homes below $200K in both Illinois and the Chicago PMSA.
The shortage of low priced homes is not limited to Chicago. According to a Zillow report in November, buyers searching for real estate will find more homes for sale overall, but the supply of lower-priced homes is growing more slowly than high-priced homes in most of the country. The number of homes for sale in the bottom price tier rose less over the last year than the number in the top price tier in most U.S. metros, Zillow said.
In Denver, there were almost four times as many homes available for sale in the upper price tier (priced at $357,900 or more) than there were homes priced in the lowest price tier (less than $219,000). The same was true in many other markets. Dallas, Atlanta, Phoenix and Nashville had at least two times more homes for sale in the top tier than the bottom tier. In Chicago, low tier inventory rose 6.5 percent last year while inventory at the top tier rose 23.2 percent.