Housing inventory plummeted in the first quarter of 2017, but that drop is even more pronounced in the starter home and trade-up markets, according to a new report from Trulia.
Comparing the national housing stock in the 100 largest metros from the first quarter of 2012 to the first quarter of 2017 shows starter homes witnessed the largest drop in inventory. During that period, the number of starter and trade-up homes fell 8.7% and 7.9%, respectively. Contrarily, inventory of premium homes fell only 1.7% from 2012 levels.
This chart shows the path of starter, trade-up and premium homes since 2012. While all types of housing inventory dropped from 2012 to 2013, starter and trade-up homes continued to pull inventory levels down in the coming years.
And as inventory becomes more scarce, median home prices continue to rise. Starter and trade-up homebuyers need to spend 2.9% and 1.6%, respectively, more of their income than last year to buy a home.
Looking at the past year, starter homes fell from 26.9% of the market to just 25.9%, while trade-up homes fell from 24.1% in the first quarter of 2016 to 23.03% in 2017. Premium homes, on the other hand, saw an increase from last year’s 49% to 51%.
Inventory is falling several reasons, and Trulia points out three of those in its report.
1. Investors – who bought up many foreclosure units during to housing crisis and now use them as rental units.
2. Price spread – when prices of homes in different segments of the housing market diverge from each other, it makes it difficult for homeowners to trade-up to the next segment.
3. Slow home value recovery – the slow recovery made it difficult for some homeowners to break even on their home and gain enough equity to sell.
However, Trulia pointed out that the increasing home prices bring with them a whole new problem. The report explained too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.