Increased buyer demand, decreased existing home turnover and not enough new home building has created a perfect storm of “crisis level” low inventory in many of the nation’s most popular cities, including San Francisco and San Jose, according to a new Zillow report.
San Jose’s housing inventory was down over 40 percent, year over year—the biggest drop, by far, nationwide. Inventory in the San Francisco metro area was down just over 27 percent, year over year, the second biggest drop in the country. And conditions are unlikely to change anytime soon, according to Zillow Senior Economist Aaron Terrazas.
“In a community like the Bay Area where land and labor costs are very high, it’s difficult to imagine a set of policies that would sharply increase inventory in prime locations,” he says. “More likely, marginal increases in inventory will come from denser development—which often carries high prices—or from more affordable building in further-flung exurbs.”
Speaking of affordability, Terrazas says the lack of inventory is hardest for those shopping in the less-expensive sector of the market, with a relative bevy of choices higher up the economic ladder.
“Home buyers who are able to compete in the upper third of the market—prices around $1.6 million in the San Francisco area and around $2.1 million in the San Jose area—will have many more options to choose from and much more bargaining power,” he says. “In the San Francisco metro there are almost twice as many homes on the market in the top price tier than in the bottom price tier.”
The recent federal tax changes are something of a mixed bag for inventory because they disincentive home owners from selling and missing out on the major mortgage deductions they currently enjoy, but they also limit local deductions that may be lead some owners to sell and move elsewhere.
“Since they lose these extra benefits if they move or refinance, homeowners benefitting from these additional deductions may choose not to move posing a headwind to inventory moving forward,” Terrazas says. “However, limits to state and local income tax and property tax deductions may push some long-time owners to downsize or leave the area. Overall, the effect should be a wash.”
Plus, Terrazas says that proposed legislative changes at the state level may help to ameliorate the problem. “The California Legislature is considering a number of bills to address the region’s crushing housing affordability challenges. In addition, state legislators are exploring ways to moderate the effects of new limits to the federal deductions,” he says. “All of these proposals have the potential to change the current inventory situation.”
On – 19 Jan, 2018 By Emily Landes