What Low Inventory Means For The Housing Market

The housing market continues to operate in a very lean environment.  Home builders are building but are focusing their efforts on multi-family units to cater to a growing renting population.  Builders are also shy about placing big bets given the recent memory of the previous housing bubble.  Places where they can build freely like Arizona, Nevada, and Florida are known to pop as quickly as they go up in value.  And in areas like California, where NIMBYism rules the day, people are now convinced that prices will never go down so the ratio of bulls to bears is extremely high.  The sentiment seems to be that there could be no wrong in purchasing real estate even if it means leveraging up into a crap shack.  Yet what is very telling is that inventory is still very low after many years.

Bouncing at the bottom

Inventory has been bouncing near the lows for almost six years now:

https://i1.wp.com/www.doctorhousingbubble.com/wp-content/uploads/2018/01/nationwide-inventory-and-la.png

Nationwide inventory is down 10 percent year-over-year from an already low year.

In Los Angeles, inventory is down 22 percent year-over-year from an already low year.

What this means for house buyers is that you are going to encounter slim pickings, house lusting shoppers, and a market sentiment favoring sellers.  If you are buying, you are not in the driver’s seat.  If you are selling, you can command top dollar even for a shanty crap shack.

One thing that has changed since the late 1990s is that we now seem to live in a perpetual boom and bust cycle.  Housing being a safe investment that tracks inflation is no longer the case.  Real estate is now like a hot stock with big leverage behind it.  When things are good, it can be very good.  When things go bad, they can turn quickly.  And for most people, the challenge in the last housing bust was simply making the mortgage payment.  Recessions tend to expose those who are over leveraged in debt.

People seem to think this hot market is because of the current administration which is hard to believe.  Timothy Geithner set the markets on fire in 2009 with QE:

https://i0.wp.com/www.doctorhousingbubble.com/wp-content/uploads/2018/01/All-About-the-QE-5.jpg

Quantitative Easing essentially reversed the market and we have yet to look back since 2009.  But this happened nearly a decade ago which is hard to believe.  Yet to think all of this euphoria is happening because of current policy is incorrect.  And clearly anyone in power is going to leverage positive factors to their side, regardless of party affiliation.  But one things is clear and that is things are looking frothy across multiple asset classes.

The housing market is deep into a FOMO stage.  There is a deep seated fear now that people will miss out:  That $700,000 crap shack will be $1 million.  Bitcoin will be $30,000.  The Dow will hit 30,000.  Everything seems to be going up yet the homeownership rate is stagnant and housing inventory is in the dumps.

The continued drought in inventory means that people will be bidding up crap shacks.  The typical home in the US costs $206,000.  The typical L.A. home is $632,000.  It’ll be interesting to see how much more this market can sustain because the bull fever is definitely out:

https://i0.wp.com/www.doctorhousingbubble.com/wp-content/uploads/2018/01/EconomicGreenfield-1-8-18-VIX-daily-vs-SPX-since-2003.png

The VIX Index shows near record low volatility meaning people expect the party to go on forever. The index nearly looks as low as housing inventory.

Source: Dr. Housing Bubble

Advertisements