Inventory is low. Really low. That’s one of the big stories right now in real estate, so I wanted to spend some time kicking around some thoughts. Let’s take a look at ten things to know about housing supply in Sacramento. If you aren’t local, I hope you can still find some value. Do you see any parallels to your market? Any thoughts?
DOWNLOAD 50 graphs HERE: Please download new market graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).
10 THINGS TO KNOW ABOUT LOW HOUSING INVENTORY
1) Housing inventory is clearly on a declining trend.
Housing supply has been vanishing over the past few years in light of greater buyer demand, sellers sitting instead of selling, less new construction, increasing sales volume, and other reasons.
2) Housing supply is really sparse (except at the top).
Housing supply was low last year, but this year it’s 15-20% lower. Having less listings means it’s really competitive for buyers – especially under $400,000. However, inventory is not low at every price range as there are far more listings at the top. Before freaking out though, this is actually a normal trend we see almost every single month. But the disparity between under $500,000 and above $1,000,000 is striking. As an FYI, it’s worth noting the top of the market does feel a bit soft.
3) Inventory is still not as low as the Blackstone days.
It’s true that inventory is anemic, but we have to remember during 2012 and 2013 it was at one month for nearly an entire year when Blackstone and other investors were gutting the market. I mention this because while the market has an aggressive feel, it’s still not what it was. If inventory persists in declining though it will be a bloodbath in terms of competition for buyers (good for sellers though as a developer mentioned to me on Twitter).
4) Inventory was 1400% higher ten years ago during the “bubble”.
Ten years ago during the worst of the real estate “bubble” popping we had a 14-month supply of homes for sale (as opposed to one month now).
5) Bank-owned inventory is not a driving factor today.
Eight years ago over 70% of all sales in Sacramento County were REOs, but that number is now about 3%. Some folks promise a new “foreclosure wave”, but it’s definitely not here right now.
6) Low inventory is putting pressure on values to increase.
Declining inventory over the past few years is a big factor in rising prices. Right now values are about where they were at the height of last summer (or slightly higher) after a lull in the fall in many neighborhoods in Sacramento County. But let’s not make the mistake to think the market is doing the same thing everywhere. The truth is in some areas increases have been modest at best over the past year while some price ranges feel flat, but the bottom of the market is hands-down experiencing the largest increases. Remember, in some price ranges the market feels more aggressive than actual value increases too, so it’s really important to sift through emotions, look at actual numbers, and not overprice because the market is “hot”. A good mantra for some areas is “Aggressive Demand, Modest Appreciation.”
7) Strong demand is a huge reason why inventory is declining:
Demand is strong right now for both buying and renting, and buyers and tenants are simply gobbling up almost anything out there (I say “almost” because buyers are still sensitive about adverse locations and overpriced homes). Thus it’s not surprising to see the median price is 7% higher than last year, the average sales price is 9% higher, and the average price per sq ft is about 9% higher. Prices increases from February to March were anywhere from 1-3% depending on the metric (this doesn’t mean values went up by 1-3% though).
8) Increasing sales volume is one reason for lower inventory.
Housing inventory is the relationship between sales and listings, so if there are more sales and no real change in the number of listings it will naturally mean inventory as a metric will show a decline. Look at the graph above to see all sales since 2013 for the first quarter of the year. Can you see how sales volume is increasing? At the same time we see cash volume declining. This reminds us the market is trying to figure out what normal looks like. It’s healthy to see sales volume growing.
9) Low interest rates have helped take homes off the market.
Historically low interest rates have played a big role in shaping inventory in that some owners are sitting on a 3.5% interest rate from years ago and they are simply not going to move unless necessary. Why would they anyway if their replacement home would come with a much higher mortgage? This means there are fewer homes hitting the market that might otherwise sell.
10) Low inventory is causing homes to sell faster.
Last year it was taking 5 days longer to sell a home and two years ago in March 2015 it was taking 15 days longer to sell a home. Can you see how low inventory makes a difference in how long it takes to sell? By the way, here is CDOM by price range. As you can see, the higher the price the longer it takes to sell. Just because it is a “hot” market does not mean every property is selling in 3 days.
BIG MONTHLY POST NOTE: Once a month I do a big market update (and it’s long purpose). Normally I talk about Placer County and the Sac Region too, but I tore my MCL a few weeks back, so I only had time to focus on Sacramento County in today’s post. Next month I’ll likely be back to normal (but I may change it up too).
DOWNLOAD 50 graphs HERE: Please download new market graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).
Questions: Did I miss anything? Any other thoughts as to why inventory is low? How would you describe the market right now? I’d love to hear your take.
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I see what you’re saying here. Inventory is your shtick 🙂 Just kidding, but that was a fun look at inventory trends in Sacramento from all those different angles.
Nice mention of shtick Gary. Haha. I actually thought it would be interesting to talk in depth about inventory. There is actually more that could be said, but at some point we have to pull the plug on length. 🙂
Hi Ryan,
The inventory at the lower ends in Folsom and El Dorado Hills are crazy. Buyers moving up have a much better option than those trying to downsize! I always love these reports from you!
Hope your ACL is straightened out soon!
Thanks DeeDee. I always appreciate hearing your take. It seems the entry-level market is the most challenged in terms of low inventory and upward value pressure. I think of it this way too. If the median price in Sacramento County is a hair below $330,000 right now, that means half of all sales were below that point and half of all sales were above that point. In other words, half the market bought homes under $330,000 last month, which means over half the market is shopping at lower price ranges. In terms of Folsom, this means half the market probably cannot afford Folsom. Once in a while something will sell in the lower $300,000s, but it’s not easy to find something under $400,000 for the most part.
Thanks so much for your well wishes. By the way, I feel silly to say this, but in my original post I hastily wrote ACL when I meant to write MCL. I corrected it above.
If people want to move down, they must go to a different area.
This is so true.
There’s also something structurally wrong with taking the highest offer when the house clearly won’t appraise. Recently, in two multiple offer situations, we lost out in a bidding war where our top offer, which was pushing the limits of what the house would appraise for, was beat by stratospheric offers that won. In one case we bid $385k and we lost because we were “too low” and now that I can see the price that it sold for…$379k, I’m convinced that picking the highest offer isn’t always the best approach. I’m still waiting to see what the other one is going to show up as being sold for… As a listing agent, I asked the offerors to cover the difference between appraised and offer in cash up to a limit AND I cut off accepting offers because at some point, the law of diminishing returns takes over where there’s no “better” offer and it’s just more work to sort through everyone’s earnest efforts to get their client’s offer accepted. I’m getting ready to write my own set of blog posts on some other structural issues I see that are causing our market to behave this way: competition for single story, smaller homes, homes still under water, fears of capital gains taxes for long term residents for higher value homes… Looking for other issues to research! Send ’em if you’ve got them. 🙂
Thank you Jane. I completely agree with you about the highest offer. Sellers really need to choose the strongest offer, which may not be the highest one. I look forward to your posts. Keep up the great work.
Excellent comment. I recently did an appraisal that was definitely at the top of the market but the agent knew when to cut off the selling price. He knew any higher and it would not appraise. I was impressed. Many reports I have been doing have come in as much as 30K under contract. And I always do data analysis from here to Timbuktu to make sure I am not missing anything. It’s getting a bit ridiculous out there…
Thank you Abdur. Sounds like a smart agent (and a smart appraiser).
I recall the market in early 2013 being the most aggressive we’ve seen in Sacramento. This was the climax of investor activity in the region and the end of nearly one year of inventory at one month. As our housing supply is seeming to trend downward I am keeping this recent history in mind as I know the market feels much different when housing supply changes even slightly. For instance, it feels different out there when we see a change in inventory from 1.5 to 1.0 months of housing supply. It also feels different if we jump from 1.5 to 2.0 months of supply. These are small changes seemingly, but the market feels hyper-sensitive to changes in inventory these days, so it’s always on my radar to watch the numbers and consider the impact on the market. Of course we don’t have the same type of market right now as we did in 2013 and there are different influences driving values. Yet having a shortage of inventory is still a big deal and one of the main factors influencing the direction of value right now.
Keep up the great work and let’s all communicate well. If anyone has a take or something to add to this thread, please do share. Your insight, questions, comments, cordial disagreement, and feedback are welcome.
The talk about inventory is interesting. In my area agents are having this discussion but when I look at a similar chart for the Birmingham, AL market I see that generally speaking, we have been at the same level since 2013, with the exception of some cyclical variations. With that being said, I think we have to dig deeper into specific areas and neighborhoods to see inventory shortages that are occurring. As they say, it’s all about location.
Good point. It’s definitely about location. This is a good reminder to sift news about the “national” market. We might hear things like, “There is a shortage of inventory in the national market,” but that certainly doesn’t apply to every state, neighborhood, county, price range, and property type. In my area there really is a shortage. I think it’s fascinating to look at the graphs and see downward movement for housing supply. We have an issue on our hands. This is impacting not only home prices, but rent prices. This is all happening of course after years of value increases. We are in an interesting spot.
Awesome info Ryan, it feels like a mirror for what’s happening here in Phoenix as well! Thank you for the telling graphs, I’m such a visual learner! :))
Thanks Bev. I’ll have to check out some Phoenix stats. It’s been a while since I’ve seen them, but it’s amazing to consider how our markets are moving. I know Blackstone also had a field day in your market too. I’m with you on being visual. It’s one thing to say something like, “Inventory is declining,” but it’s another thing to actually show it. Very powerful to see I think.
Whenever I speak with my clients about low inventory, I usually bring up the fact that anyone who bought their home within the last 5-7 years probably got the deal of the century. They were able to buy near the bottom of the market, and then could refinance to a super-low interest rate around the 3.5% you mentioned. So why trade up?
Whether you’re a millennial, a Gen-Xer or a Baby Boomer, it simply doesn’t make much sense to sell your home and buy another one now. Not only will the price be higher, but the interest rate will be higher too. So most people are planning on staying put, and I don’t blame them.
And you’re right about all the competition for buyers being down in the lower price brackets. I have a listing right now at $420k that isn’t getting nearly as much attention as all my listings in the bread-n-butter price range do ($250-350k)
As for the huge surplus in the million dollar bracket, it will be interesting to see how that market fares into the distant future… back in the 80’s, it was all about owning the big fancy house you’d see on lifestyles of the rich and famous and driving a Porsche Targa…
But nowadays, millennials are so broke they’re resorting to tiny homes instead, and they seem to value experiences over ownership:
https://www.forbes.com/sites/blakemorgan/2015/06/01/nownershipnoproblem-nowners-millennials-value-experiences-over-ownership/#39702e3b5406
Why save up for a down payment when you could blow $1,000 – $5,000 on a trip to Coachella that just happened? There will always be million dollar home buyers, but that market is currently flip-flopped with the lower price brackets and is super-soft right now.
Thank you Wes. I appreciate your take on things. The market really does feel different in various price ranges. It’s amazing how that works. Thus we have to remember to not project county-wide trends on every single neighborhood.
The million dollar market usually has anywhere from 5-12 months of housing supply throughout the year. I’m not surprised at all to see 10 months above on the graph. The figure fluctuates of course depending on how many 1M+ sales there were the previous month. I am hearing lots of feedback about higher ranges being soft as you said.
I had someone wanting an appraisal on a tiny home, but the only problem was it was not going to be attached to the site. It was therefore a mobile home, which means it was personal property instead of real estate. I really wanted to do the appraisal, but I referred a colleague who does personal property instead. There is so much hype about tiny homes, but the problem is land is expensive, so it’s not easy to make it all work. The prospect of buying a dialed in home for $50,000 is alluring, but the cost of land, installation of utilities, permits, etc… means it’s never just $50,000. Personally I would like to see some tiny homes show up in the market though. I’d like to see some storage container homes come too. 🙂 (can you tell I’m a fan of funky stuff?)
Good read.Great analysis.I like the graphical analysis.
Thanks so much. I appreciate it.
Great post…any resources for this kind of quality analysis in Douglas county, Oregon?
Hi Kristy. Thank you sincerely. Unfortunately I don’t know. Hopefully there are some real estate professionals digging through the numbers and telling the story of value.