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?
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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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3) Housing inventory remains low: There isn’t any quick fix for anemic housing inventory, so we can expect to see another year of low inventory unless something drastic happens causing sellers to list their homes. That brings me to share something I talked about last month. In a 
6) Disappearance of the $100,000 market: There is definitely upward value pressure on the lowest end of the price spectrum. Other price ranges last year were much more flat, but not so much with the lowest prices in town. This year in Sacramento we are going to very likely see the disappearance of the market under $100,000. Each month lately we’ve had maybe 6-12 sales under $100,000 for single family detached homes, and after the next few quarters I expect that number might be down to zero. We shall see though.
10) Multiple offers: We are likely to continue to see a climate of multiple offers in the Sacramento area. In a market like this I would advise sellers to be realistic about pricing their homes properly. What have similar homes actually sold for? What is similar and getting into contract right now? It’s easy to cherry-pick the highest non-similar sales in the neighborhood because “the market is hot”, but we have to remember similar homes are the “comps” appraisers are going to use (key point). At the end of the day appraisers have to support the value, so it may be best to be reasonable on the front end rather than run into all sorts of “appraisal issues” because the property got into contract too high. Remember, just because housing inventory is low does not mean you can command whatever price you want. That may have been more true in early 2013, but it’s not true right now.