The following is an executive summary from an analysis of why Idaho’s home prices have risen faster than the rest of the nation. Read the full report online.
Many economists view the housing market as one of the crucial indicators of the overall health of an economy. When the economy is approaching a recession, the real estate market is usually among the first sectors to slow down and among the first to recover during a boom. If this assessment is accurate, Idaho’s housing market prices during the past three years will be critical for future economic forecasts. The average value of single-family homes in the state has increased by about 173% since the third quarter of 2011, compared with nearly 80% nationally.
Within the state, discussions about potential sources of this growth have been centered primarily around out-of-state migration inflows and inadequate supply of new housing. However, multiple studies have shown the recent rise in home prices across the nation has not been limited to the impact of these two factors alone. Consequently, this study explores one factor that has significantly impacted home values but received considerably less attention: namely, existing housing inventory. Inventory of existing housing can be defined as the total volume of unique, active, and previously-occupied home listings. The volume of these listings acts as a signal to prospective buyers and sellers about the relative tightness of the market, response to these signals ultimately impacts the prevailing housing market prices.
This report examines the impact of existing housing inventory on home prices while controlling for other confounding factors. These factors include income, labor market, population growth, demographics, and crime rates. The study hypothesizes that a negative change in existing housing inventory leads to a rise in home prices. Idaho’s declining housing inventory has provided a signal to the market that the supply of housing is running low. In turn, increased competition amongst buyers to bid a winning offer has led to higher market prices. To test this hypothesis, a Spatial Durbin Model (SDM) of 49 Idaho cities was estimated using data from 2011 to 2020. This model is particularly useful in this analysis because it enables the estimation of spillover effects. These effects measure the extent to which a specific change taking place in one city is transmitted to the neighboring cities. In addition, this report provides an exploration into the sources of Idaho’s declining existing housing inventory.
The report findings show a statistically significant relationship between existing housing inventory and prices, aligning with research expectations. The results are summarized as follows:
- Compared to all selected variables, existing housing inventory has the greatest impact on home prices. These suggests that Idaho’s recent housing market boom has significantly been driven by declining housing inventory than population or income
- There is an inverse relationship between existing housing inventory and price. A 1% decrease in housing inventory during one year is associated with a 0.5% rise in housing prices during the following year.
- Spillover effects are larger than direct effects. One year following a 1% decrease in existing housing inventory in a given city, housing prices within the same city increase by 0.059%, while prices in the neighboring cities increase by 0.45%.
- The recent decline in Idaho’s existing housing inventory has been driven by a decline in homeowner and renter mobility. This means that the supply of existing housing is declining as a result of households owning or renting longer than they did in the past.
One important policy implication from this report is that attempts aimed at addressing Idaho’s spiraling housing market prices will require supply-side strategies. Any effective strategies should focus on increasing and diversifying the supply of housing across Idaho’s cities, particularly those that have been severely affected. These include strengthening production of entry-level homes — given that this is where demand is greatest, with a large cohort of Millennials currently seeking to enter the market.
Bonang Seoela, regional labor economist