Rumor has it buyer-occupants are standing in line ready to buy, and California’s low housing inventory alone is thwarting their demand for housing.
A quick lesson in fundamentals: end user demand controls the consumption of housing, not sellers. End userdemand organically originates from those intending to occupy the property as shelter or rent it out for a long-term investment. If end users do not want it, the size of the MLS inventory does not matter.
Thus, inventory has little to do with home sales volume. In contrast, inventory has everything to do with prices.
Consider the following:
- when inventory is lean and sellers are few, sellers are able to realize higher sales prices due to the crowding of buyers competing for each available property; and
- when inventory is flush and buyers are few, buyers are able to pick and choose, cherry-picking as they push prices down.
If you are concerned by the low housing supply, not to worry. The sources of housing inventory are not about to dry up anytime soon.
When inventory is actually lacking and unable to meet buyer demand, you will observe two reactions:
- home prices rising for a sustained period beyond six months; and
- positive and negative equity owners, including speculators, listing their home for sale, brought out by rising prices.
This situation occurred in 2013 and 2014. Speculators bought up the available housing inventory on a massive scale, advancing home prices well beyond normal, which is the rate of consumer inflation. Unable to further sustain escalating prices beyond 18 months, home sales volume began to decrease by Q4 2013.
However, inventory is not lacking in 2015; it is being replaced every day by:
- speculators exiting the market;
- frustrated short sale owners;
- foreclosure sales and REO resales;
- some conventional sales by positive equity owners; and
- new construction.