Market Snapshot—Supply and Demand

Already strong spring home buying season in sight.

Following a winter lull, forward looking market indicators suggest we may be seeing a strong spring home-buying season. Data on pending home sales shows a 23 percent increase in activity between December and  January. Pending home sales are forward-looking   indicators of future home sales activity, offering solid     information on future changes in the direction of the market. A sale is listed as pending after a seller has  accepted a sales contract on a property. The majority of pending home sales usually become closed sales  transactions one to two months later.

Where is demand coming from? There has been a  significant pent-up demand for homes.  Following the recession, household formation in California fell dramatically. The latest estimate from California Association of Realtors (CAR) shows that some 575,000 fewer households were formed in California between 2008 and 2012 due to economic hardship. If the  household formation trends continued at the pace seen before the recession, California would have not only that many new households, but 60 percent of those households would be homeowners. That means we are  missing about 345,000 new homeowners in California. With improving economic conditions and solid  employment growth across the state. Pent-up demand for homes is evident in the pending sales index for  January that CAR recently released.

There are obstacles, however, that potential buyers may be facing. For one, inventory of homes listed for sale is still at historical lows. Despite an increase in inventory in January by 12.1 percent from December of 2013 and by 6.7 percent from a year ago, the supply of homes in the lower segment of the market continues to fall, while inventory of homes prices at million dollars and higher went up.

Why is the inventory so low? There are several reasons worth mentioning. On one hand, following the collapse of the housing markets, home prices along with historically low interest rate led to a very affordable housing market. Those that were able to take advantage certainly did and absorbed a great share of the low-priced inventory. In the meantime, the supply side of inventory did not see any progress.   Secondly, there are still about 15 percent or nearly 1.3  million of California’s 8.65 million homeowners being  underwater. Thirdly, foreclosure pipeline which comprised a large share of home sales over the past few years has dried up and not many foreclosures are available for sale. Lastly, investors od both large and small scale, who recently bough properties are renting  them instead of selling them. That may change as prices continue to improve. The low    inventory market, however, may be good news now for sellers. Potential sellers who have been contemplating   putting their home up for sale may want to take advantage o f the low inventory of homes available for sale and list their homes.

Source: March 2014 Market Snapshot California Association of Realtors