Why is inventory so low? As of today, January 24, 2022, there are 426 single family homes for sale in Santa Clara County (population appx 2 million people). A year ago it was about 800 and the end of January. 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.)
We have a supply and demand imbalance, with demand strong but available homes for sale low. One question involves equity. Since home prices have doubled in the last few years, home owners can afford to sell. With so much equity, why is inventory so low? After the downturn from 2008 – 2010, we knew that many sellers could not afford to sell. But now they can. Some homes have appreciated enough in 6 months that there is sufficient equity to sell and at least break even. What gives?
Why is inventory so low? When will it get better?
First, 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:
- 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)
- If home owners refinanced at a lower rate, they may be concerned about selling at the low interest rate and then buying with a higher rate tomorrow
- Covid may be causing temporary slowdowns with homes coming onto the market. Some sellers cannot get their homes ready as planned due to being sick themselves. having workers for sprucing the property up become ill with the coronavirus, or supply chain issues with needed items coming slowly. Some clients just don’t want to sell during the pandemic, period, so that angle may not be more long lasting.
Often we see more listings hit the market in January and even more in February. It’s way down now, and I am suspecting that Covid and its impact has become a bigger issue with the Omicron surge. If that’s the case, as Omicron recedes, we should see that seasonally typical rise in available properties. The usual February increase may end up happening in March (possibly April). We may still be asking in April “why is inventory so low?”, but hopefully it will be much improved over the current numbers by then.
When will it get better?
A few things will need to happen for the inventory to loosen up.
- Covid induced shortages may be mostly temporary. As we get through the current wave, I believe we’ll see more homes come on the market.
- As Covid becomes endemic, and eventually is treated more like the flu, we may find that everyone adjusts. Perhaps the “Spring selling season” (which is normally hottest around February – April) will get pushed to a warmer part of the year when windows can be more open and the virus isn’t circulating so much. It could be that April – June may end up with more inventory if that situation does unfold.
- New housing starts & interest rates: First, new homes need to be built (and for us in the San Jose area, in a commute-worthy range). Home owners will need to feel confident about being able to get their next home. For that to happen, prices will need to quit rising so fast (so that they aren’t priced out of the market if there’s a six month hiatus between selling and buying) and interest rates need to hold steady at an affordable rate
- 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.
Every market is good for SOMEONE. Right now, it’s a strong seller’s market – if 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.
Want to sell your Silicon Valley home? Please email me for a confidential, no obligation and no-pressure consultation. Mary Pope-Handymary@popehandy.com (offer for home owners only, for homes not under contract now).
Some additional perspective on the historic number of homes for sale in Santa Clara County.
Here’s a graph showing the seasonally typical inventory, which usually rises early in the year and falls later in the year. Note how over time the peaks are lower and so are the valleys. One of the deepest valleys was in 2018, which also was a year with particularly sharp price appreciation.
A key part of the inventory shortage is the strong demand and the pace of sales. In the chart below we see the relationship between active listings and closed sales. When the closed sales outpace the new homes coming on the market, prices shoot up. The bigger the gap, the more prices rise. It’s quite dire in some parts of Santa Clara County. Recently I did a (private) study for a client and it looks like in one subset of the market, home prices are up about 20% from 3 months ago.
A part of the question about why is inventory so low is that buyers are pouncing on new listings.
Inventory year over year for 2012 – 2021. January is seeing inventory rise, but it is only about half of what it was a year ago.
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 any better than what we have right now. In my whole career I’ve never seen it so tilted in the home seller’s favor.