Why is inventory so low? As of today, October 26, 2023, there are 796 single family homes for sale in Santa Clara County (population appx 2 million people). A year ago it was about 1165 and the end of October. Where have all the listings gone? And when will it get better for home buyers? (You can check Santa Clara County inventory and other real estate stats on this blog.)
Why is inventory so low: historical perspective, how low IS it?
Here’s a look at our houses for sale from Jan 1999 to today. Please note that the MLS has a problem with its data sharing feeds, and if I pull this same info in a month, some of the numbers (not just this month) will likely change.
- Inventory Oct 1999 through October 2022 (only Octobers, 24 months) = 2640. Inventory was bloated during the Great Recession, so that’s not representative of “normal”.
- If we consider just 2013 – Oct 2022 (10 Octobers), which I think is much more typical, the average inventory is 1403.5
- The current inventory level is 57% of the last 10 years and 30% of the last 24 years (not including 2023 in the averages).
The lack of inventory is causing a lack of sales, layoffs in various real estate related industries, and pretty much economically challenging for Realtors, lenders, title and escrow people, inspectors, stagers, photographers, and anyone else involved in the buying and selling of homes.
We have a supply and demand imbalance, with demand outpacing supply but available homes for sale low.
Why is inventory so low? What is causing the shortage?
Next, let’s consider the root causes of the problem, and which ones may not be ongoing.
Reasons for the low supply of homes for sale include these:
- Higher interest rates are keeping current home owners, particularly those in “starter houses”, from moving up. They probably have a mortgage at 3% or less and cannot afford one at close to 8%. Winners in this are (1) cash buyers and (2) those involved in construction, as we may find starter homes imply being expanded. Contractors are in tremendous demand now.
- Tax considerations (ongoing)
- for long term home owners, there will be a significant capital gains consideration in many cases
- for property owners under age 55, moving will likely mean an increase of property taxes
- last year, CA Prop 19 was passed, making it possible for older sellers to transfer their property tax base anywhere in the state, but that has not helped as much as hoped with the inventory crisis
- Fear of selling and not being able to buy a replacement property keeps many people from selling (ongoing as long as inventory is so restricted). This is particularly true for investors who want to do a 1031 tax deferred exchange.
Who is selling?
Why is inventory so low among normal seller situations? Most of what we are seeing among home sellers today are the “have to sell” situations.
- In many cases they are homes inherited after parents die.
- Sometimes they are sold due to a change in the number of people in the household. This includes divorce, or a major life change such as getting married and combining households or expanding them (the 1 bedroom condo for a couple now expecting twins).
- At times a home goes on the market as the seller needs to move to assisted living (cash needed for that costly care).
- At times it’s relocation for work.
- Some of the homes are the result of downsizing, which many now prefer to call right sizing. In these cases the home owners sell, cash out, and purchase a smaller home for cash here or out of the area. The interest rates don’t directly impact them, but may give them an edge as buyers without a loan. to retire out of the area.
- Some properties are sold because the seller has an adjustable rate mortgage and the new payment amount is untenable. These people probably have good equity, so they can sell and not have to do a short sale or foreclosure to get out from under burdensome payments.
- Flippers and contractors sometimes purchase these property, rehab them, and put on the market as a beautifully remodeled home. There aren’t many truly turnkey houses listed for sale, so these get a lot of attention.
Why is inventory so low and when will it get better?
Why is inventory so low? Part of this is seasonal, but as you saw from the averages above, it’s low even for this time of year.
Often we see more listings hit the market in January and even more in February and March. I believe that barring any more rate hikes, that will be the case again in 2024.
A few things will need to happen for the inventory to loosen up beyond what is seasonally expected.
- Interest rates need to level off. We have seen that consumers are more concerned about RISING rates than simply HIGH rates.
- If interest rates fall to under 6% it should loosen up things and home owners won’t feel so trapped by the cost of mortgages.
- New housing starts will help, but it may not be enough. In Los Gatos we are seeing a large influx of developments in various parts of town – many would say too much, too fast for the infrastructure to keep up.
- The addition of ADUs will help, too. The state is now permitting cities and towns to allow the SALE of ADUs. The ADU would probably be in condo ownership and the house and cottage would need CCRs, rules and regulations, and so on. Some ADUs are very small and others are like starter homes (houses up to 1500 SF). This will be interesting to watch.
- Home buyers will need to vote with their feet and decide that it’s just too expensive. As home prices escalate far faster than incomes can keep up, at some point it will become unsustainable. Buyers will slow down or stop buying until it levels off or corrects. This is our normal pattern. That said, we keep hearing about a net out-migration from Silicon Valley, but the people leaving may not have been the potential home buying public so much as the lower paid workers who have moved to Stockton, Fresno, or other parts inland. While many potential home buyers have relocated to Austin and other high tech hubs, there’s still tremendous demand here and it hasn’t been enough to negatively impact prices.
- Simply put: we need more supply and less demand for the situation to improve.
Why is inventory so low? Summary
Every market is good for SOMEONE. Right now, it’s a strong seller’s market – anytime you’re asking “why is the inventory so low?” you can be pretty sure it is a deep seller’s market. And within that seller’s market, it’s ideal for people wanting to sell and relocate out of the area since in most places even where it’s a seller’s market it is much, much calmer then here.
Many factors which are out of consumers’ control are causing the inventory shortage. While many would be home buyers are priced out of the market for buying, enough are still able to purchase that prices are being pushed up.
If you are interested in buying, it’s best to be fully pre-underwritten and to have a good amount of cash on hand should there be an appraisal deficit. It is not a fun time to be a home buyer!
If you are interested in selling, the conditions could not be much better than what we have right now.
Please reach out of you would like to chat with us about working together to help you to sell or buy a home in Santa Clara County.
Related reading to Why is the inventory so low, and when will it get better?
San Jose real estate market analysis (this site, updated monthly)
Santa Clara County real estate market update (this site, updated monthly)
Possible new Robson Homes project near Belgatos Park (Live in Los Gatos blog)
Silicon Valley home buying and bidding wars (Move 2 Silicon Valley, our relocation site)
Sell one home and buy another (popehandy.com)