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The story of the housing market in Westchester and the Hudson Valley at the end of 2016 was all about inventory. The number of homes on the market continues to decline, which is already negatively impacting the rate of sales growth, but is likely to positively impact price appreciation in 2017.
Inventory throughout the region continues to fall. As we have explained before in the Rand Report, we measure the “months of inventory” by looking at the number of available homes on the market, and then calculating how long it would take to sell them all at the current rate of absorption. In the industry, we consider anything below six months of inventory to be a signal of a tightening market that will tend to drive prices up. So it’s notable that region inventory at the end of 2016 was down to 6.2 months. But the decline was more striking if you look at the individual counties, with inventory down to 3.8 months in Westchester, 5.0 in Putnam, 4.9 in Rockland, and 6.4 in Orange. Indeed, if you take Dutchess (which is still in the double digits) out of the calculation, the overall regional average is down to 4.2 months of inventory. That’s extraordinarily low, especially when you consider that regional inventory was over 10 months just two years ago.
The lack of inventory is starting to have an impact on sales. Sales are still relatively strong, but the pace of growth is slowing. Single-family transactions were up for the region, rising 6% from the fourth quarter of last year, which now marks nine straight quarters of year-on-year sales growth. And regional sales were up sharply for the calendar year, rising over 14% from 2015 and crossing over the 15,000 transaction mark for the first time since 2005. Indeed, yearly sales are now up 78% from the market bottom in 2011. But we see some troubling signs. For example, that 6% rise in sales from last year is the smallest year-on-year sales increase in eight quarters. Moreover, although regional sales were up, individual counties were flat or down: Westchester was up only 1.4%, and Rockland was down 3.6%. Essentially, the market needs more fuel for the fire — without more listings on the market, we are likely to see sales flatten or even decline in 2017.
Prices continue to struggle throughout the region. The regional average sales price was down just a tick for the quarter, but fell almost 4% for the calendar year. How can that be? We are seeing sustained buyer demand coupled with declining inventory over the past few years, and sales totals that approach the tail end of the last seller’s market. Basic economics tells us that increasing demand and falling supply should drive prices up. And, well, they will. It’s just a matter of time. At some point soon, these high levels of buyer demand, along with the low levels of inventory, will start creating the kind of multiple offer situations and bidding wars that will drive prices up. In turn, as prices go up, homeowners watching and waiting from the sidelines will be tempted into the market, which will moderate the potential surge in price appreciation. In other words, we’re about the witness “Economics 101” in action.
Going forward, we remain confident that the market conditions are ripe for meaningful price appreciation in 2017. Demand is strong, bolstered by near-historically-low interest rates, prices that are still near 2004-05 levels (without controlling for inflation), and a generally strong economy. And supply is tight, at least until some price appreciation brings more sellers into the market. So in the short term, we might see some declines in home sales off the highs set in 2016. But over time, as high-demand-and-short-supply starts driving prices up, inventory will come back. And we will eventually see the return of sales growth, this time coupled with meaningful price appreciation.
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