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U.S. housing inventory reaches historic lows, hurting first-time buyers

After eight straight quarters of decline, inventory continues to dry up

Housing inventory Shutterstock

The U.S. housing market has again moved toward greater disconnect between supply and demand. According to a new Trulia report, U.S. home inventory has tumbled to a new low after the eighth straight quarter of decline.

The drop in availability is being felt most acutely by those seeking starter homes, who are being forced to spend more of their income to buy in a market that’s becoming more and more competitive. According to the latest Trulia Inventory and Price Watch, How Rising Home Values May Be Stifling Inventory, the number of starter homes has dropped 8.7 percent in the last year. Less supply means rising prices, which force new homebuyers to spend an average of 2.9 percent more of their annual income on a new home, especially in popular markets. Those with the strongest recovery, on average, have experienced the largest decreases in inventory.

The overall picture remains bleak for other sectors of the market, as well. Trulia’s report segments the market, collecting data for starter homes, trade-ups, and premiums homes, and all sectors are suffering. Both trade-up and premium home inventory also dropped (7.9 percent and 1.7 percent, respectively). Overall, housing inventory sank to its lowest number on record.

Trulia home inventory Trulia

Trulia analysts have a few reasons to explain why low inventory is persisting despite a moderate housing recovery: Investors bought up foreclosed homes during the recession and turned them into rental units; increasing price divergence, or price spread, between different sectors of the housing market has made it harder for existing homeowners to trade up and free up inventory; and the slow pace of recovery means many homeowners remained underwater for much longer than expected. Trulia also found an slight correlation between the pace of the recovery and the housing inventory drop:

These findings suggest that a moderate home value recovery doesn’t affect inventory much, but a strong recovery does and impacts inventory of starter homes the most.