One More Big Reason You Can't Buy a Home

Lack of inventory is especially hurting would-be buyers of starter homes, Trulia data show
Photographer: Craig Warga

Eight years after the crash, the housing market still awaits the return of the first-time home buyer. Beyond the struggle to build credit to meet stricter standards, and the difficulty saving for a down payment amid skyrocketing rents and surging student loan burdens, there lies an even simpler explanation: fewer choices.

It's the lack of inventory that's haunting Ralph McLaughlin, chief economist at real estate website Trulia, as he looks at the year ahead in housing. Inventory is strongly correlated with affordability across all price segments, which Trulia breaks up into "starter," "trade-up" and "premium" homes.

The stark numbers: Overall housing stock is down 39 percent from four years ago, and it's even worse for starter homes, according to the data in the debut of a quarterly inventory report released Monday. Properties valued in the bottom third of all listings have seen a 44 percent drop over the same period.

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While scant supply is good news for sellers yearning for bidding wars, the inventory outlook is bleak for the industry as a whole and especially for buyers, McLaughlin said.

"Industry-wide, it's certainly going to be a very pertinent problem, both for buyers of real estate but also the real-estate industry itself — particularly agents and lenders," he said. "If there are a lot fewer homes on the market than there have been in the past, there's likely to be fewer home sales and fewer loan originations."

Why the slimmest pickings for the two cheaper categories? McLaughlin says three factors are to blame: First, investors are still clinging to a large share of homes that were foreclosed during the downturn. Also, a large number of homeowners still "underwater" — likely to sell at a loss as prices are still below their pre-recession peak — means that fewer of the cheapest properties are being listed.

Lastly, a widening spread between the costs for the most-expensive homes and those in the middle price range has caused a shortage for the latter, since owners of trade-up homes are less likely to put their properties on the market if the cost of moving into the highest category is climbing, McLaughlin said.

The limited options are crimping affordability. Buyers of starter homes now have to pony up 38 percent of their income toward a purchase, compared with 32 percent in 2012.

Affordability of starter homes has fallen the most in California over the past four years, the Trulia data show. The West and South saw the biggest declines in stock of these properties.

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Even amid these gloomy prospects, McLaughlin sees little need to worry that the next housing downturn will look like the last crash. Tighter lending standards have removed one of the most significant causes of the last real-estate downturn, so the next cycle probably will feature "either a plateau or a soft landing of the housing market rather than a complete collapse," he said.

Inventories for the three price groups were calculated among the 100 largest U.S. metro areas over the period from January 1, 2012 to March 1, 2016. Price categories are determined based on home-value estimates of the entire housing stock, rather than listing price, in order to control for swings in the mix of homes on the market.