On today’s show we are talking about one of the factors that can be at play in a tight market. We have just gone through a period of more buyers than sellers, of rapidly rising prices and of multiple offers. That’s not all markets or sub markets. But many major markets including New York, Toronto, San Francisco, Seattle. My home town right now has less than two months of inventory in the market and frankly when you conduct searches in individual neighborhoods it’s pretty common to find only two or three homes for sale in the area. People looking for a larger home in the same area or those looking to downsize who want to remain in the same area have very little choice.

So why are there so few homes on the market? People clearly want to move.

The most common response is that they won’t sell their house because there is nothing to buy to replace it. It’s like that puzzle game with the squares whereby moving one square at a time you can rearrange the squares to match up and form an image. But that puzzle only works if there is an empty square. Otherwise there is no mobility possible for the squares. If there isn’t inventory for sale in the market, there is no mobility.

If you take my home city of Ottawa Canada, the inventory in the rental market is less than 1%. So even saying that you can rent temporarily until you find a new home doesn’t work. Most landlords are demanding a 12 month lease  So if you find the perfect home in month 4 you can still be on the hook for a 12 month lease which means double the home ownership cost for an extended period of time.

In that situation the seller faces a dilemma. Do they sell now when they know they can get top dollar? Do they wait for better inventory conditions in the future? When will that be? Will prices fall at that point? What will be the interest rate at that time? Will prices continue to go up? Will you get priced out of the market?

When the market conditions change, will there be some warning? What will the warning signs be and will you even notice before the change has fully arrived?

What we see from looking at other markets across North America is that when changes occur, they occur quickly. But the market is actually several markets that don’t change in unison. For example when you segment the market by price, you discover that you might have 2 weeks of inventory at the entry level of the market and six months of inventory at the top end of the market. Some homes are sitting on the market for 18 months. 

Let’s look at the San Francisco Bay Area and Silicon Valley in particular.

That market boasts some of the best paying jobs in the technology sector.

It’s no secret that homes are expensive in Silicon Valley. That’s been the battle cry for 30 years. But about 9 months ago, the market dynamic in Silicon Valley changed in a matter of weeks. The market was expensive before the shift. Taxes were high. Interest rates increased a quarter point. Hardly enough to fundamentally change affordability of a property.

Today, prices have moved down 4.3% since the high last fall.

It’s very tempting to believe that hot market conditions will continue. If the demand was being driven by foreign investment, and all of a sudden that source of capital coming into the market dries up for whatever reason, the market can turn very quickly. One such market is Miami where a high percentage of buyers come from outside the US, and South America in particular. Argentina just instituted capital controls after 4 years of eliminating capital controls. So it’s probably a safe bet that the number of Argentinian buyers in the Miami market is going to drop significantly. A few years ago there were a number of buyers from Venezuela trying to escape the economic malaise. Today, that wave has passed and Miami developers who assumed the demand would continue were caught off guard with excess supply.