This article appears in Real Estate Outlook 2018.

The number of homes for sale nationwide has declined on an annual basis for the past 35 months, according to the December 2017 Zillow Real Estate Market Report. Lack of inventory, coupled with strong demand from buyers, is one reason why home values across the country are reaching new peaks.

“Tight inventory fueled by a tight labor market and low interest rates propelled home values to record heights in 2017, but the outlook is now much less certain. Tax reform will put more money in the pocket of the typical buyer but will limit some housing-specific deductions. Overall, this should increase demand for the most affordable homes and ease competition somewhat in the priciest market segments,” said Zillow senior economist Aaron Terrazas.

Lack of inventory

“Inventory is still rough for home shoppers, at 3.4 months of inventory in January compared to 3.6 months a year ago, according to the National Association of Realtors,” said Daren Blomquist, senior vice president with ATTOM Data Solutions, a curator of public property records. Around six months of inventory is considered a balanced housing market, says the Real Estate Center at Texas A&M University.

Months of inventory, sometimes called months of supply, is a measure of the time it would take for all the current inventory to sell at the current rate without new houses coming on the market.

“That said, there was a slight uptick in inventory in January compared to December, when inventory was at 3.2 months. We do expect inventory to gradually increase in 2018 as some headwinds hit the housing market, namely higher interest rates and tax reform, which may make it tougher for some sellers to get their homes sold as quickly. Additionally, builders have been gradually increasing the homes being built the last few years, which should also help pad inventory a bit more than it has been in past years,” Blomquist said.

Market to market

Inventory can vary dramatically from market to market.

“In places like Denver, San Francisco, Portland, San Jose and Dallas we’re hearing of average days on market below 20, while in markets such as New York-Northern New Jersey, Cleveland, Virginia Beach, Philadelphia and Hartford, Connecticut, average days on market are around two months or longer. In the latter group of markets, there is some additional inventory because of legacy foreclosures from the last housing crisis still working their way through the lengthier foreclosure process in those states,” Blomquist said.

Availability affects cost

“Low supply relative to the demand for housing is putting upward pressure on home prices, resulting in accelerating home price appreciation in 2017. ATTOM Data Solutions shows an 8.2 percent increase nationwide, up from 6.8 percent home price appreciation in 2016 and the strongest annual home price appreciation since 2013,” Blomquist said.

Seventeen of the 112 markets analysed saw double-digit home price appreciation in ATTOM’s 2017 year-end home sales report, led by Ocala, Florida (up 14 percent); Kansas City, Missouri (up 13 percent); San Jose, California (up 13 percent); Salem, Oregon (up 13 percent); and Nashville, Tennessee (up 13 percent).

Get comfortable before buying

“Buying a home is still a full-contact sport, but we expect it to get moderately less bruising in 2018 compared to 2017,” Blomquist said. “But prospective buyers as always should make sure they are comfortable in terms of finances before making the plunge into homeownership. More important than trying to time the market is making sure you are comfortable affording the home you are buying.”