An examination of the low-inventory housing market

 

The low inventory of housing has been the subject of some heated debate recently.   There’s a great deal of people who lay the burden of the low inventory issue squarely on the shoulders of the builders.  Others, such as this report from Trulia, see it as a combined problem of many factors coming together. Let’s examine some of these factors.


Capital Gains Exclusion

Prior to 1997, the year we saw inventory levels drop off.   A home owner could avoid paying the capital gains tax on a home sale if they used the funds to buy another equal but usually more expensive home.
Once the Taxpayer Relief Act of 1997 became law, the rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts resulting in

 

Starter Home Squeeze

Due to a significant price gap between starter homes and the step up homes first time home buyers are getting stuck in their starter homes unable to step up into a larger home because they simply can’t afford it.   As these starter home buyers hunker down it creates a shortage of home available on the market to new first time home buyers.   Not only does this create a shortage of available starter homes, it also results in a greater demand for rentals which a driving factor in what we’re seeing today with the rental crisis.

 

Low Rates

Favorable financing conditions create two problems.   It increases the available buyers looking for a home but reduces odds of someone selling who may have been underwater because they can refinance at a lower rate.

 

Hold outs

When the housing market is hot like it has been in recent years you inevitably end up with people who hold out on selling their homes in the hopes of squeezing as much value out of it as the can. This “hold out” attitude further contributes to availability problems and ironically further increases home values.

 

Stagnant Development

Just before 2006 new development peaked at over 1.8 million new single family dwellings.   But new development now sits at a number 3 times lower at just over 600,000 and half the normal rate of 1.2 million.  This diminished capacity to produce new homes has play a major role in the inventory crisis we are facing.  To make this matter worse the length of time to build these homes has also doubled as well as the costs.

 

Can we fix it?

It’s possible but unlikely.   Fixing this issue would require a systemic change in US economics as the middle class disappears under wealth inequality, and we are more likely to see another economic downturn before we see any changes to our economic structure.  One thing is clear, if gap between home pricing continues on its current trend many middle class families will be renters.