When an irresistible force like housing demand confronts an implacable barrier like ever-tightening inventory shortages, the pressure will grow until something has to give. In the case of our current unstable housing market, the only emergency steam valve that can relieve the bursting pressure is soaring prices, and the biggest loser is affordability.

  • Fueled by low rates and rising incomes, demand remains strong enough to keep supply critically low.
  • Soaring prices in May are changing the face of affordability across the nation, putting homeownership beyond the reach of thousands of first-time buyers.

When an irresistible force like housing demand confronts an implacable barrier like ever-tightening inventory shortages, the pressure will grow until something has to give.

In the case of our current unstable housing market, the only emergency steam valve that can relieve the bursting pressure is soaring prices, and the biggest loser is affordability.

Until either supplies improve substantially or demand withers, rising prices will keep pushing upward, far beyond income levels in some markets. With each passing month this season, another metric of the housing economy falls victim to the dysfunction caused by the three-year inventory drought.

In April, sales took a blow as lack of supply left buyers with not much to buy. In May, prices soared.

“Home prices keep chugging along at a rate that is mot sustainable in the long run,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

May Market Reports at a Glance

Source

Monthly Sales Trend

Annual Sales Trend Monthly Price Trend Annual Price Trend Median Sale Price Median Days on Market Comments
NAR 1.1% 2.7% 3.2%  5.8% $252,800 27      (List to contract) Median sales price hit a new high; days on market reached a new low.
Realtor.com NA NA 2.2% 10% $275,000 60     (Median age of listings) The pace of sales kept momentum as prices reached double-digit price growth.
Redfin 19.5% 7.5% 2.9% 6.8% $288,000 37        (List to contract) More than a quarter of homes sold for more than their asking price.
RE/MAX 20.6% 4.3% 2.9% 3.6% $232,500 51       (List to close) Strongest May sales in five years.
Zillow* NA NA .6% 7.4% $199,200 77    (April, List to close) Low inventory is one factor that continues to drive gains in home values.

*These data are not sale prices but valuations based on Zillow’s AVM.

“Buyers are running out of options as home prices reach double-digit growth,” said realtor.com’s Javier Vivas.

Competitive buyers feed on new listings

National housing market reports showed that in May, new listings improved slightly in many markets, but just enough to stoke demand as contracts pulled homes off the market in a handful of days.

NAR reported that 55 percent of homes sold in May were on the market less than a month — a new high. Trulia found that 57 percent of homes were still on the market after two months back in 2012, while today that number had fallen to 6 percent.

Inventory has been limited since the end of the Great Recession, pointed out Zillow’s Dr. Svenja Gudell. “With fewer homes for sale, competition becomes so fierce that people snatch then up so quickly, and homes spend less time on the market.”

Trulia’s chief economist Ralph McLaughlin zeroed in on how the affordability crunch is disproportionally impacting mid- and lower-income buyers by breaking price tiers into starter homes, trade-up homes and premium homes by updating Trulia’s Inventory and Price Watch for the second quarter.

He found that nationally, the number of starter and trade-up homes on the market has decreased substantially, falling 15.6 percent and 13.1 percent respectively during the past year, while the inventory of premium homes has fallen only 3.9 percent.

Starter and trade-up buyers must spend 3.1 percent and 1.7 percent more of their income to buy a home this year than they did last year. Premium buyers are spending only 0.9 percent more.

The result of the disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers.

May Inventory Watch

Source Monthly Active Listings Annual Active Listings Months of Supply Comments
NAR +7.2% -9% 4.2 Some would-be buyers have to postpone home search due to low supply.
Realtor.com +3% -11% NA One in three homes selling in less than 30 days.
RE/MAX -1.3% -16.2% 2.6 Days on market and months of supply both set new lows
Redfin +3% -10.9% 2.7 Buyers tore through the small but welcome bump in fresh inventory before it could begin to make a dent.
Trulia

(starter homes)

NA -8.9% NA Starter homes down 15.6% from last year.
Zillow NA -9.4% NA Inventory fell at the fastest pace in four years.

Where opportunities exist

The endless inventory crisis is limiting options for most buyers, but this month’s reports include advice and opportunities for diligent buyers.

  • Although inventory is down nationally and in most parts of the country, it did rise in a handful of metros, with the biggest annual gain in Austin, Texas (+23.9 percent). Two other Texas metros made the list of big inventory gainers in May: In Houston, it climbed 9.1 percent and in Dallas, 8.3 percent. Las Vegas inventory rose 19.2 percent, and Kansas City climbed 8.2 percent, according to Zillow.
  • The slowest-moving markets are predominantly in the South and Northeast. Each of the top 10 slowest-moving markets is east of the Mississippi, with the highest concentration in Florida and South Carolina. For example, more than 54 percent of homes are still on the market after two months in three large Florida metros — Sarasota (54.2 percent), Cape Coral-Fort Myers (56.3 percent) and Miami (62.3 percent), while two of the largest markets in North Carolina — Winston-Salem (57.5 percent) and Greensboro-High Point (57.2 percent) — made the top five. The other two markets to make the top five slowest-moving markets are Fairfield County, Connecticut, (60.8 percent) and Knoxville, Tennessee, (57.4 percent), according to Trulia.
  • According to Redfin Chief Economist Nela Richardson, what trade-up sellers need is a committed buyer who will make it to the closing table without delays or hassles. To provide this assurance, savvy buyers aren’t just offering the highest price; they are using creative strategies like pre-inspections and non-refundable deposits to demonstrate to sellers their commitment to close the deal.
  • Homebuyers frustrated by not being able to move fast may have better luck seeking out the ugly ducklings of the housing market, according to Trulia. Instead of trying to strike quickly as soon as a home comes onto the market, buyers might want to consider looking for homes that have sat on the market for awhile and figuring out why. Though the reasons are more likely to be a deal-killer than not (needs a new foundation, roof, electrical, etc.), all it takes is just one that isn’t to find success.

Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.

Email Steve Cook.

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