By putting listings and a wealth of supporting information into people’s hands, home-buying portals such as Zillow have made it possible to browse homes in great detail from anywhere with a web connection. At the same time, other companies such as Ellie Mae have helped make the industry more efficient by streamlining mortgage applications, appraisals, documentation and so on. Thanks to such innovation, the time it takes to search for a home and buy or sell happens faster than ever.
Yet every rose has its thorn. Although making the process quicker and more efficient is good and welcome, it has helped to shrink the amount of housing inventory for sale. This is an unwelcome side effect at a time when buyers are engaged in fierce competition over a relatively small number of homes for sale by historical standards. Prices are pushed up as a result.
The inventory of homes for sale has indeed fallen. According to data from Zillow, it decreased nationally from a peak of more than 2.4 million homes in July 2011 to fewer than 1.4 million in July 2017.
Yet at the same time, the rate at which homes have been listed and sold has actually risen! Over the same period, the number of homes sold each month has increased from less than 300,000 to almost 500,000. How could inventory have fallen when the number of homes being listed and sold was growing? Because homes spent less time on the market. Even though homes flowed into the market at an increasing rate, the pace at which they were sold picked up even more, so the inventory of homes for sale at any given moment declined.
Of course, the time it typically takes to buy or sell a home depends on many factors besides innovation. For instance, when a buyers’ market becomes a sellers’ market, one would expect the time it takes to buy a home to rise and the time it takes to sell one to grow shorter. But that’s not what happened. Data from Redfin show that during the past several years, the time required to buy and sell a home have both decreased, consistent with innovation making the process more efficient.
Replenishing the inventory of homes for sale is the key to rebalancing the market. A crucial part of the solution is building more new homes. In addition to creating new inventory directly, new homes also spark a sequence of reactions known as vacancy chains, in which every buyer but the last also vacates their old home and sells it to the next buyer. Because they enable several additional homes to be sold, new homes have an outsized impact on the volume of homes sold and on inventory.
There are also gains to be had from undoing perverse financial incentives that help keep many homes off the market even though their residents would rather move, especially in the most expensive areas. The $500,000 cap per couple on the exemption from capital gains tax when selling an owner-occupied property, for example, has many older residents in pricey coastal markets aging in place rather than subjecting their children’s future inheritance to a tax hit. Were it less onerous for the elderly to move, their exit from homeownership would spark vacancy chains, too.
Last but not least, it’s important to realize that the swing of the pendulum from a low-inventory sellers’ market to a high-inventory buyers’ one has elements of a self-fulfilling prophecy. About two-thirds of buyers are selling one home and buying another in a short space of time. Today, these potential repeat buyers are reluctant to sell because they fear the risks of buying in a sellers’ market. However, if they were to catch wind of the notion that the sellers’ market is reversing, that might prompt them to put their homes on the market. That would, in turn, help make the notion a reality. If a buyers’ market were to follow, an innovation-induced reduction in inventory would all of a sudden be welcome.
Issi Romem is chief economist for BuildZoom Inc. and a fellow at the Terner Center for Housing Innovation at the University of California Berkeley. Distributed by Bloomberg View.