The U.S. is experiencing a housing shortage, and one of the real estate markets feeling the squeeze most is California. Across Southern California in fact, housing inventory has dropped 62.9% year-over-year according to March 2021 data, with only 0.7 months of inventory. That’s a decrease of 52.4% in active homes for sale on the market! To review, a neutral or balanced real estate market usually has anywhere from 3 to 6 months of inventory.
So how did we get into this particular predicament? There are several long-term factors that have been brewing for years and other short-term factors over the last year that have contributed to California’s housing shortage. Let’s break down the top 5 reasons real estate inventory is so low.
What is causing the housing shortage?
1. Low-Interest Rates
Yes, low interest rates are great for home buyers. But not only do low rates increase demand, they also limit supply because it makes it easier for homeowners to keep their current home and still be able to afford another, rather than selling. Over the last decade, thanks to homeowners doubling up and large-scale business investment in single-family rentals, there is an estimated 7 million homes now reserved for the rental market that would have previously been re-saleable real estate.
2. Aging in Place
As low interest rates have made homeownership more affordable, the number of income properties has climbed. This is evident in the success of rental companies like Airbnb and VRBO that encourage owners to hold onto properties instead of selling to use as not only traditional long-term rentals but also short-term rentals as well. More and more California homeowners who “bought low”, decades ago, are choosing to hold onto their homes instead of selling, thus aging in place and tightening inventory further.
3. Homebuilder Declines
Homebuilders have been cautious since the housing bubble burst 12 years ago, building fewer homes every year since the market crash. Since 1959, on average, 1.5 million homes were built each year according to Census Bureau data. However, in the past decade, only 900,000 homes have been built each year. Limited new housing supply, coupled with enticingly low-interest rates all exacerbate the housing crisis.
4. Millennials Hitting Homebuyer Age
The average millennial turned 32 last year, coinciding with the median age of a first-time homebuyer, which is 31. So as millennials continue to hit prime home-buying age in their peak earning years, we will continue to experience a fiercely competitive real estate market for the foreseeable future.
5. Housing Policy
The CARES Act foreclosure moratorium has kept financially distressed homeowners from selling, but foreclosures were already at record lows before the pandemic hit. In fact, according to a recent report from CoreLogic, U.S. homeowners with mortgages have seen their equity increase by a total of $1 trillion since the third quarter of 2019, an increase of 10.8%, year over year.
So, although there are 2.5 million homeowners in the mortgage forbearance program, many have gained significant equity. Once the moratorium is lifted, we should not expect a wave of foreclosures to bring more inventory to the sparse market.
Why is the housing market so high in California?
All of the factors contributing to low inventory have helped drive up real estate prices over the last year. It’s the basic principles of supply and demand, and right now supply is low and demand is high on the real estate market, creating a boom in housing prices. But don’t be confused thinking this is a housing bubble like we experienced in the Great Recession. Lending standards have remained high since the last market crash, meaning that homeowners today can afford their homes and in fact, are equity rich. According to the latest ATTOM Data Solutions U.S. Home Equity Report, California ranked as one of the top five states with the largest equity gains, with equity-rich homeowners rising to 46.1% in the third quarter of 2020.
So although the housing market is high in California, don’t expect a wave of foreclosures any time soon. There will inevitably be more foreclosures when the Federal CARES (Coronavirus Relief and Economic Security) Act ends later this year, but because U.S. homeowners are more financially stable this time around and have more equity in their homes, our real estate market will remain strong.