It would not be overstating to say home inventory has been at a near-famine level in some of the nation’s top markets. Where a 6-7 month supply of home inventory is considered typical for a balanced market, supply dropped to the lowest levels of 0.5 month for San Jose and 0.6 month for Seattle in Fall 2017.
The worst of the shortage affects starter homes, for which rising land costs, labor costs, and material costs (which could be made worse with intensifying talks of trade tariffs) have dampened lower-margin new-home constructions at the entry level. In addition, recent years of low mortgage rates have made starter-homeowners reluctant to give up their low-rate mortgage to sell and buy a new home at higher rates.
A less frequently discussed factor is millennial homeowners’ current resistance to sell and upgrade, which is atypical for this homeowner-turned-buyer segment. In many ways, millennials are the engine of the housing market. They form the largest first-time homebuyer segment, then they upgrade in a few years to produce more sell and buy transactions, freeing up starter-home inventory, and the cycle continues to fuel housing growth.
In ValueInsured’s latest Modern Homebuyer Survey, millennial homeowners reported concerns for housing overvaluation, and rising pessimism for home price futures. One would expect millennial homeowners – being in the enviable position of owning in this seller’s market – to rejoice at rising home prices, but their reported sentiments tell an opposite story. Any rise in their home equity wealth on paper is negated by their concern for a pending correction, and the worries that they could be “buying high” if they were to upgrade now. According to the survey:
- Among all millennial homeowners surveyed in July 2018, 2 in 3 (67%) believe homes prices are currently overvalued, and not sustainable
- 70% believe people who buy in their neighborhood now are overpaying
- Among millennial homeowners who are interested in selling to upgrade, 3 in 4 (75%) think it is now a good time to sell, but they are hesitant to pull the trigger because they want to avoid buying high
- 68% cite a possible housing crisis as one of the reasons they have not pulled the trigger to sell and upgrade
- 78% say they are waiting and trying to time the market
One would expect many homeowners to hurry and sell in this market peak to maximize their profits; millennial homeowners’ hesitation may first appears puzzling. But it makes sense when you consider their circumstance: majority of millennial homeowners sell when they have outgrown their starter home and need to buy a bigger, more expensive home. If homes in their area are overvalued, even if these homeowners can sell high, they would have to buy even higher for an upgrade home. If the market corrects after they buy, their loss on the new, more expensive home would be harder to overcome.
As they continue to wait for a break in the market, at least some of these potential seller-buyers are seeing some signs of relief. In July, 63% of all millennial homeowners reported the spring home-buying season in their neighborhood this year was less busy and not as competitive compared to same time last year. If their observations are accurate, we could soon see a shift in the market, and more of these sidelined upgrade buyers could be rejoining the market.