We were perusing through some stats the other day (imagine that!) and happened upon a list of the top 5 states with the newest housing inventory. Here is the list, courtesy of Arun Barman, Research Economist at Realtor.org.
- Nevada – 7.7%
- Arizona – 6.7%
- Florida – 5.4%
- Idaho – 5.4%
- Texas – 5.0%
We’ve long held the hypothesis that run-away development can ruin a real estate market, but we’d yet to really see a macro-level list that corroborated that thought. What of course jumped off the page to us is the top 3. Nevada, Arizona, and Florida all have had major real estate busts.
Where is California, you might ask. California experienced growth in new inventory over the past real estate boom. However the growth in new inventory did not cast a shadow over existing inventory (as it did in the other states) which is why California did not make the list. With development costs in California so high, investors and/or developers are more apt to rehab and flip property than they are to build new. The places where property values have taken the biggest hits in California (and the Bay Area) are the newer suburban and exurban developments. In general, the more established communities have been hit, but not as hard.
Getting back to the hypothesis, it really all comes down to value. The four tenants of values are demand, utility, scarcity, and transferability (remember it as “DUST”). An item (any item) must have all four of these characteristics to have value. When developers go crazy, building anything and everything in a booming real estate market, they put downward pressure on the existing homes in the area. This is because all the new inventory greatly affects the scarcity portion of the value equation.
It is for this reason (we believe) that San Francisco’s market has not imploded the way other markets around the nation have. The lion’s share of San Francisco inventory is old, scarce, and one-of-a-kind. Furthermore, our local government makes it very difficult for developers to build massive structures that send un-welcomed, downward property value pressure throughout our neighborhoods.
Age of San Francisco's Housing Stock - Courtesy of Propertyshark.com (click to enlarge)
This is a big reason why we’re especially cautious when taking clients around the newer parts of the City. We’ve seen what an onslaught of new inventory can do to real estate markets and we’re wary of what it will do here (albeit localized to just a few select pockets within SF).
Do we hate developers? Read the rest of this entry ?
