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Busting inventory myths: Why aren’t there many homes on the market?

07/27/2017

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Ralph McLaughlin

With eager homebuyers and their agents plagued by low inventory all over the county, Trulia chief economist Ralph McLaughlin decided to take a closer look at the popular explanations for the problem and bust some inventory myths.

As he put it: “Everyone agrees the U.S. housing market is being squeezed by low inventory. What they don’t agree on is why.”

He looked at five common explanations ranging from investors, price appreciation in certain markets, gaps between prices for trade-up and starter homes, markets with a larger share of older homeowners who move less often, and markets with more or less homebuilding. His aim and methodology was to analyze their impact relative to other factors.

Trulia’s research found that of the five factors, it was the lack of homebuilding that had the biggest effect by far — followed by, to a lesser extent, investor activity — though all had an impact.

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The chief economist found that new home construction was strongly related to inventory. Every 1 percentage point increase in a market’s housing stock between 2012 and 2017 is, on average, correlated with inventory that is approximately 13 percent higher.

For example, if the Los Angeles metro had increased its housing stock by 2.6 percent instead of 1.6 percent between 2012 and 2017, you could have expected their existing home inventory to increase from 10,181 homes on the market to 11,504 in the third quarter of 2017, an increase of over 1,300 homes.

The next biggest impact on housing stock, Trulia found, was investor activity. Across the 100 largest metros, every 1 percentage point increase in the housing stock owned by investors in a market, is, on average, correlated with inventory that is 2.8 percent lower.

For example, if investors in the Boston metro reduced their ownership of the housing stock from 43.7 percent to 42.7 percent, you could have expected their existing home inventory to increase from 3,290 homes on the market to 3,382 in 2017 third quarter, an increase of nearly 100 homes.

This is useful information for policy makers. Homebuilding and investor activity are factors that could be made more attractive through a combination of strategically targeted land use and tax and financial policies, said McLaughlin.

A surprise finding, meanwhile, was that the share of owner-occupied homes owned by baby boomers is actually positively correlated with inventory. Every one percentage point increase in the housing stock owned by those aged 55 and over is, on average, correlated with inventory that is 3.6 percent higher.

McLaughlin explained. “We think the effect is driven by the fact that markets with the largest share of boomers just happen to be in retirement destinations such as Florida and Arizona — states that haven’t much been impacted by low inventory because they tend to build a lot of homes,” he said.

“This isn’t also to say that boomers owning a larger share of the housing stock won’t become problematic in the future. Their decision to either age in place or move to a retirement home could have a substantial impact on home inventory as well as the broader economy.”

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