- Supply of starter homes is declining at 17% year-over-year, nearly twice as fast as all homes, and over 3 times faster than larger homes.
- As of the last week of July, only 450,000 homes listed below $200,000 remained in the market, about 120,000 fewer than this time in 2015.
- Smaller homes in top counties spend an average of 46 days on market, a record low for July, and 25 days faster than large homes.
- Demand for smaller homes on realtor.com is also at a record high, up 46% year-over-year, and 1.37 times higher than larger homes.
The housing shortage has reached a record streak, and scores of homebuyers ready to enter the market are hitting an invisible wall. Here we dissect this housing trend by home size and price tier to understand the recent impact and help formulate an outlook for the coming months in individual segments of the market.
A shift in single-family home inventory
Key to understanding the shortage is seeing how the composition of active inventory has transformed. In the span of three years, the national median listing square footage has jumped from 1,831 to 1,958 square feet, an increase of 7% or 127 square feet. That’s the size of a den or small room in some markets. But there’s more to that statistic, and houses are not magically getting bigger. Recall the total stock of homes is not the same as the inventory that’s available; only about 1.2-1.5% of all homes out there are listed for sale at a given point during the year. So the jump in size is instead a direct reflection of a change in the composition of inventory, and the constant decline of smaller homes available on the market. New construction is the other culprit, congregating in the mid-upper tier in recent months.
The proof is in the pudding (see figure 1). Smaller single-family homes (750<1500 sqft) represented 29% of all inventory back in 2013, now they only account for 24%. In an era of declining affordability, a growing millennial population and an increasingly less mobile boomer population, starter homes have been gobbled up quickly, and most importantly, failing to be replaced. In contrast, large homes (3000<6000 sqft) used to represent 18% in 2013, now 22%, while the share of mid-sized homes (1500<3000 sqft) has remained fairly stable over that period.
We’ve come to a historic juncture in the housing market, where for the first time there is a 1:1 ratio of small to large homes, so for every home listed above 3,000 square feet there is now only one home listed between 750 and 1,500 square feet.
Figure 1 – Single-Family Home Inventory Share by Size (YTD 2013-2017)
Source: Realtor.com inventory metrics as of July 2017. Shows percentage share of active single-family listings by year based on data for the top 500 largest counties. Small, Mid-Size and Large, and Very Large tiers are defined based on square footage brackets: 750<1500, 1500<3000, 3000<6000 and 6000+ respectively.
How low can housing inventory go?
The picture gets more striking when we factor in the fact starter home inventory has been falling at double digits for the last 14 months. Dissecting the trend by home size reveals just how low the shortage has gone (see figure 2). Supply of starter homes is down 17% y/y, considerably faster than the overall market, and over three times faster than larger homes.
This view by home tier functions as a good fossil record of what started in late 2015 and continued well into the end of 2016; what are now happy buyers got in early while supply was healthier and richer and the market responded by injecting new listings at those price points until it couldn’t sustain those levels of demand. This year, persistent waves of frustrated buyers, most of which are first time, younger buyers, are hitting the invisible wall of shallow, fast-moving inventory.
Figure 2 – Active Single-Family Home Listings Trend by Size (Mar 2016-Aug 2017)
Source: Realtor.com inventory metrics as of July 2017. Shows year-over-year change in active single-family listings by home size as a combined average of the top 500 largest counties. Small, Mid-Size and Large tiers are defined as the 25, 50 and 75th percentile of homes in each county based on square footage.
Affordability takes a hit
Even when buyers find attractive, well-matching homes in the market, they instantly become inaccessible if they are priced too high. And that’s where the numbers tell the more striking tale.
A simple way to picture the growing affordability woes is by looking at incomes relative to home prices. Home prices have grown over three times faster than income since 2011. Median list prices have increased on yearly basis for 64 months now, going from $185,000 to $275,000, up 48% during that time frame. In contrast, the median household income only saw a 15% increase over that time span. Incomes rose vigorously during the early recovery, but the gap with home prices became and remained very visible after 2013.
In less than two years, the total volume of small single-family homes for sale has declined by nearly 240,000. There are now roughly than 450,000 single-family homes listed under $200,000 in the country. And more importantly, the price of that segment of the market has surged significantly faster.
Applying the price lens makes the starter home gap more visible (see figure 3). Supply of starter (<$200K), mid-tier ($200<350K), upper-tier ($350<750K) single-family homes is down 21, 9, and 3 percent year-over-year respectively.
Figure 3 – Active Single-Family Home Listings Trend by Price Tier (Mar 2016-Aug 2017)
Source: Realtor.com inventory metrics as of July 2017. Shows year-over-year change in active single-family listings by price tier as a combined average of the top 500 largest counties.
Controlling for location: a consistent trend at market level
The national trends measure the overall shortage pattern over the years. However, the shortage is not just a result of affordable and hotter markets losing inventory faster than over-valued and cooler markets. Looking at the trends within markets (specifically the top 500 largest counties), the trend holds and we observe a consistent supply and demand imbalance across home sizes (see figure 4).
Smaller homes in each of the markets analyzed spend an average of 46 days on market, down 12.9% year-over-year, and a record low for July. In contrast, larger home spend an average of 71 days on market, down 3.9% year-over-year, suggesting the gap in market velocity between small and large homes is widening.
Figure 4 – Days on Market by Home Size in the Largest 500 Counties
Source: Realtor.com inventory metrics as of July 2017. Shows median days on market by home size as a combined average of the top 500 largest counties. Percentages reflect year-over-year change. Starter, Mid-Size and Large tiers are defined as the 25, 50 and 75th percentile of homes in each county based on square footage.
What’s behind the shortage: dissecting the demand-supply imbalance
Adding demand into the mix yields a consistent story and completes the picture. Simply put, the shortage is a compound result of buyer demand not seeing the corresponding supply. Inventory is being consumed in the section of the market that needs it the most.
Inventory stalls when homes are sold and not replaced. Starter homes are increasingly in short supply and experience more competition. Looking at our latest data on online activity, starter homes receive 1.12 times more views than the typical listing, and 1.37X times more views than large homes. And the gap is increasing. Interest for starter homes, as measured by realtor.com for sale traffic, has grown faster than both the mid market and the upper tier, up 46, 40 and 37% respectively.
In most markets, a higher number of realtor.com pageviews equate with a higher number of buyers reaching out to agents for more information. The trend there is consistent too. Starter homes see 17% more agent leads than the typical listing, 22% more agent leads than large homes.
Demand for homes is largely inelastic, driven by life events, and remains inelastic up to a certain point. A home is the largest life investment for most, a purchase that’s equally charged in emotional and financial burden. The difference between now and pre-recession years is that even when homebuyers are being drawn push harder and aim higher, banks are keeping things real and absorbing any unfounded optimism.
Historically, smaller homes have always experienced higher demand as the pool of buyers is larger. These sell faster, and entail lesser risk, as transactions are quicker and smaller. That part of the story is not new. What’s new is that the gap has grown increasingly larger, to a point where ready and eager buyers are being easily blocked from entering the market, fuelling frustration and forcing them to evolve mechanisms to cope with the lack of homes. More on that in part three of the shortage.