Low Inventory in Sonoma County – Are Sellers Just Deciding Not to Sell?

 

There has been much talk about how extremely low the inventory of home listings has become in Sonoma County, with much speculation regarding the reasons why sellers aren’t selling. Upon closer examination however, it’s very apparent that home sellers deciding not to sell is not the issue that is impacting the supply of homes on the market. In reality, Sonoma County currently has a higher than normal rate of new listings coming on the market.

First, some context: For the last 15 years, the number of homes listed for sale on the MLS (Multiple Listing Service) in Sonoma County has averaged somewhere in the neighborhood of 5,746 per year, 97% of which are resales.

Studies have estimated that on average, about 5% of US owner-occupier homeowners sell annually. According to the Bay Area Census, there are approximately 113,000 owner-occupied housing units in Sonoma County: 5% of 113,000 units would equal 5600 homes sold per year. This is in line with our average of 5,746 homes sold per year. Clearly in Sonoma County, sellers are selling homes at the annual rate that they’ve been selling at for the last 15 years. Our extremely low inventory is not because sellers have somehow decided not to sell.

So what could it be? Well, a couple of things…

Relationship between Supply and Demand

The principal factor behind the perception of drastically low inventory is nothing more than hugely increased demand. Higher demand means homes sell more quickly, which then shrinks the number of listings on the market at any given time (which is really how we perceive supply). According to the MLS, 84% of the new listings that came on the market were sold within 66 days in 2014, even shorter than 2013’s 77 days-on-the-market. The average days on market over the last 6 months continues to be right around that 66 days. April & June 2015 brought us an even lower 56 days on the market. An analogy might help explain this: Think of a water hole (of listings for sale) fed by a relatively constant stream (of new listings coming on market). Over time that water hole of listings will continue to get significantly diminished as more people drink from it.

Substantial Drying Up of the REO Market

Inventory has declined substantially as the number of foreclosures/distressed properties have dwindled. The average number of REOs and short sales in the market from 2011- mid 2012 was 905. Currently, we’re at 15% of that number or said another way, we have 700 to 800 fewer REOs and short sales than we did three to four years ago. An improving economy, preventive measures such as loan modifications, and an increase in home values are just some of the factors affecting the decline in distressed properties.

Below are 3 charts illustrating the issue. The first chart indicates the actual days on the market the average Sonoma County property took to sell. The second chart illustrates the effect of increasing demand on supply of homes for sale, even if the number of new listings coming on market doesn’t decline. Finally, our third chart shows how the dwindling of the REO and short sale market has affected inventory.

Below are 3 charts illustrating the issue. The first chart indicates the actual days on the market the average Sonoma County property took to sell. The second chart illustrates the effect of increasing demand on supply of homes for sale, even if the number of new listings coming on market doesn’t decline. Finally, our third chart shows how the dwindling of the REO and short sale market has affected inventory.

Chart 1

DOM Jan-June 2015

Chart 2

how increased demand affects the inventory of homes available to purchase

Chart 3

REO Chart - Tracy Otsuka

There certainly are other, distinctive, but lesser factors exacerbating our low inventory market as well.

The number of new homes being built in the county has not been able to keep pace with the high demand. As a matter of fact, only 251 permits for new single family homes in the county were issued in 2014, which is the lowest level in 45 years.
Unless sellers are moving out of the area to a place where the market is less competitive and homes are significantly less expensive, some potential sellers are so daunted by the challenge of finding a new home within Sonoma County under existing market conditions so they’re simply staying put hoping for things to calm down. Others, worried that they will have no home are holding off selling their home until they’ve found a replacement property which can often take many months.

With extremely high rental rates and extremely low mortgage interest rates, a small but growing percentage of homeowners, who typically would have sold their homes, are renting them out instead.

The factors above are all probably diminishing listing inventory to greater or lesser degrees, but ultimately our lack of inventory is not because the annual number of new listings is so drastically low by historical measures. It’s the relationship between supply and demand and the decline in distressed property sales in Sonoma County that have made a relatively stable supply of new listings terribly insufficient to meet demand and have put upward pressure on home prices.