The number of starter and trade-up homes continued to fall in Q2, with starter-home inventory dropping 15.6% and the trade-up category falling 13.1% year-over-year, according to Trulia’s latest Inventory and Price Watch report. Overall housing inventory fell 8.9% after slipping for nine-straight quarters.
The share of starter homes dipped from 23% to 22.1% during the period. Would-be buyers in the segment paid 3.1% more of their income for a home purchase than they would a year ago. Trade-up buyers paid 1.7% more and premium buyers paid 0.9% more.
- Falling inventory levels are fueling price hikes. Buyers in Q2 spent 39.1% of their income on a starter home, versus 31.7% in Q2 2012. Trade-up buyers spent 26% of their income, compared to 21.5% five years ago.
A lag in for-sale listings is driving stiff competition among buyers whose growing numbers are helping to ratchet up home prices across the market. Redfin found that demand for homes edged up 11.3% from April to May, marking the highest level of homebuyer demand since January 2013, when the company started tracking the figure.
The intensifying competition has been particularly hard on first-time buyers, many of whom face financial challenges from student loan debt, variable mortgage rates and high rents. Still, this group made up 35% of home sales in 2016, representing the largest share of sales since 2013, the National Association of Realtors reported.
That cohort will struggle to find available properties as new construction comes online slowly and fewer owners list their homes. Many current owners, afraid of being unable to find an affordable replacement home in time, have chosen to delay selling while others have listed their properties at lower prices than they are likely to fetch, whether to speed up the sale or due to uncertainty around home-price growth.
Regardless, sellers run today's market. Fannie Mae's most recent Home Purchase Sentiment Index found the share of respondents who say now is a good time to sell (an index high), outstripped the share of respondents who say now is a good time to buy (an index low).
The remedy to today’s intensifying price growth lies primarily in builders' ability to keep up with demand for new housing. Supply-side challenges from the lot and labor shortages, however, are providing resistance to making that happen. Driven by a drop-off in multifamily construction, housing starts slid to their lowest level in eight months in May, while building permit authorizations — forecasting future building activity — fell to their lowest level in more than a year.
Still, builders are optimistic, with an index tracking confidence in future business opportunities falling slightly but staying well above breakeven in June.