California Owners Holding Back Inventory; Lower New Listings Aid Markets

Dan Oppenheim
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Dan Oppenheim, CFA

(415) 889-5617

doppenheim@ssrllc.com

July 23rd, 2019

 

California Owners Holding Back Inventory; Lower New Listings Aid Markets

  • Lower levels of new listings with constrained inventory. California markets continue to benefit from self-correcting mechanisms of fewer new listings coming to market, along with the lower construction activity. In June 2019, new listings were lower than in June 2018 in each of eight key California markets (the Inland Empire, Los Angeles, Oakland/East Bay, Orange County, Sacramento, San Diego, San Francisco, and San Jose), with new listings down 10-15% in each market (based on data from Redfin). That lower level of new listings is important in helping to keep inventory levels low and to tighten the overall supply-demand, which then results in stronger pricing. This is important as homebuilders with higher levels of exposure to California have recently underperformed, but will likely fare better as these trends become evident.
  • Inventory at two months of supply or less in NorCal; three months in SoCal. With fewer homes listed for sale and reasonably healthy demand, the months supply of homes for sale is at or below two months in Oakland (1.6 months), Sacramento (2.1 months) San Diego (2.4 months), San Francisco (1.6 months), San Jose (2.1 months). Inventory levels are slightly higher, but still modest in Los Angeles (3 months), Orange County (3.3 months) and Riverside (3.2 months). This limited inventory is crucial for pricing and buyer sentiment (excess inventory leads buyers to lose urgency).
  • Price discounts in line with last year, with large portion of homes selling above list price. Most California markets saw little change in the percentage of homes on the market that have seen price cuts, with Sacramento have a two percentage point decline in June 2019, relative to June 2018. The NorCal markets of Oakland, San Francisco, and San Jose saw increases of five to ten percentage points relative to Jun 2018, but this is likely a function of some greed on the part of sellers, as inventory has been tight enough (1.6-2.1 months in these markets) that more than half of homes have sold above list price in these markets (52% in San Jose, 57% in Oakland, and 66% in San Francisco). Overall, there has been a modest decline in the percentage of homes selling above asking price, but this remains at high overall levels due to the lack of inventory: a low of 21% of homes selling above asking price in Orange County to a high of 66% in San Francisco.
  • Continue to see opportunity in housing stocks with modest valuations. The California markets are important to the margins and profitability of many builders, with the reduced listings and stable conditions likely to lead to better margins in late 2019 and into 2020. We prefer homebuilders such as D.R. Horton (DHI), Lennar (LEN), Meritage (MTH) and Toll Brothers (TOL).
Exhibit 1: SSR’s Preferences Among Housing-Related Sectors
Source: SSR analysis

California Owners Holding Back Inventory; Lower New Listings Aid Markets

Fewer new listings came on the market in June 2019 than June 2018 in each of the eight key California markets, with new listings down 10-15% on a year/year basis. This will likely help to keep the market sufficiently tight and drive upward pricing power.

Exhibit 2: Fewer new listings coming to market in June 2019 than in June 2018
Source: Redfin and SSR analysis

NorCal markets have two months or less of inventory, which will be a positive for pricing. The higher level of months supply in SoCal (approximately three months) should be watched, but is still at a reasonable level.

Exhibit 3: Inventory constrained – especially in NorCal, creating urgency for buyers
Source: Redfin and SSR analysis
Exhibit 4: Less froth, but still seeing high share of homes selling above list price
Source: Redfin and SSR analysis

Continue to see opportunity in housing stocks. The limited new listings and low level of inventory should lead to better pricing in the months ahead. Homebuilding stocks often struggle during the seasonally-slower summer, but then typically perform better in the fall and winter, ahead of the spring selling season. We would expect to see that this year, given the solid fundamentals and inexpensive valuations. We prefer homebuilders such as D.R. Horton (DHI), Lennar (LEN), Meritage (MTH) and Toll Brothers (TOL).

Exhibit 5: Homebuilder valuations
Source: S&P Capital IQ and SSR analysis

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