The housing market has been on a steady recovery, but there is one major obstacle that could potentially slow down its momentum: tight inventory.
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“The lack of inventory is a big obstacle for the housing market right now,” says Jed Smith, managing director of quantitative research for the National Association of Realtors. “It becomes a supply and demand issue; without more homes available, home prices will continue to rise, which is bad news for home buyers.”
Smith expects home prices to rise 5% in 2014, which he calls “sustainable and reasonable,” but if they start to creep any higher, it will start pricing buyers out of the market and fuel speculation of another bubble.
On Thursday, the National Association of Realtors reported housing inventory fell 9.3% at the end of December, to 1.86 million available homes, which is about a 4.6 month supply at the current sales pace. According to Smith, a normal market has about a six-to-seven-month supply available.
Jed Kolko, chief economist at housing website Trulia, points out that the market experienced a shift in the type of sales last year. “We saw less distressed sales and more conventional sales last year, which means foreclosures and short sales are making up a smaller share of overall sales. Conventional sales were up 12% last year.”
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While it’s expected that inventory levels drop in the winter, Kolko says that even when the numbers are seasonally adjusted, December’s inventory levels were still at a seven-month low. “This is tough news for buyers; they will have less to choose from as we head into the spring buying season.”
Lack of new home construction and homeowners waiting to hang the for sale sign in hopes of catching higher prices are keeping inventory levels low.
According to Smith, a normal housing market brings about 1.5 million new housing starts a year, but only around 800,000 new homes hit the market last year, meaning supply is not keeping up with demand. “The Great Recession forced many of the smaller builders to go out of business because they didn’t have access to the credit market and those builders tend to make up about 50% of new home construction.”
The NAR reported existing-home sales rose 1% in December, to 4.87 million. For 2013, sales hit 5.09 million, the most since 2006, and up 9.1% from the prior year.
Existing homes, according to Kolko, are the driving force behind inventory levels with previously-owned homes selling more than 10-to-1 to new homes. He adds that higher prices will nudge more homeowners onto the market — but it won’t be a stampede. “Inventory is still 18% lower than normal levels and will remain tight in 2014, just not as tight as last year.”
The number of days a home sat on the market last month jumped to 72 from 56, causing some concerns of a potential cool off. “We studied this number very closely when we saw such an increase because that could mean trouble,” says Smith from the NAR. “But we looked at all the other indicators and we determined it’s an outlier and it doesn’t agree with the other data. It’s most likely weather related.”
He did say that if the trends continue, it could significantly slow the recovery.
Potential buyers need to start their hunt early and be willing to expand their desired location or ease up on their wish list. “Some people will have to move faster and be prepared for competition," says Kolko. "Bidding wars won’t be as common as last year because investors have left the market, but they will still occur.”