Low Real Estate Inventory and How it Effects You
If you are unfamiliar with the terminology of low inventory in the housing market you may need a quick explanation of what exactly that means. Just like any other economic market, there is a supply and demand for homes. There are many factors that go into an inventory shortage in the housing market, and the simple explanation is: there was a boom in demand, and for various reasons, the supply has not been able to keep up with replenishing the market.
In the market between the months of April 2020 - April 2021 there was a drop of 53% in the homes on the market for sale. As of February of this year, there was little sign the inventory would be bouncing back. We’re still seeing decreases over the previous year's drops. Realtor.com, who are on the forefront of forecast predictions, does believe that a small increase in supply should be coming, but only by a rate less than 1% per month.
Looking into the reasons why the inventory has not been able to keep up with demand, many various factors are involved; some obvious and some not so obvious. As we are all aware, back in early 2020 the Covid-19 pandemic threw all our lives into a bit of a frenzy, and this did not leave the housing market unscathed. The uncertainty surrounding the pandemic left many individuals that may have been looking to sell unable to or unwilling to sell during such trying times. In turn, fewer houses were available for purchase.
Another factor due to the pandemic was the decrease in the availability of building supplies due to the labor shortage. In turn, the decrease in said supplies also increased the price of what was available, and made it somewhat prohibitive to build new homes. This also added another contributor to decreased housing inventory. In 2020 alone, there was a decrease of nearly 25% of new home permits.
There was one other major issue that has had a large effect on the decline of inventory for the market, and that was the decrease in mortgage rates. The average mortgage rates in 2019 were around 4.75% and within the last 2 years it has gone down to an average of 3.11%. What this means for the inventory market is two fold. First being that many, instead of purchasing new homes, refinanced their homes at a lower rate. The second seems counterintuitive to the first point, but with lower mortgage rates also comes larger numbers of investors to purchase homes that are available at these lower rates.
Now as a buyer, seller, or real estate agent none of these may seem like it is something you need to know, but it is always important to understand the underlying conditions of the market and why things are the way they are. This inventory shortage affects anyone currently doing business in real estate and we will go over what that means for both buyers and sellers.
First, let's discuss being a buyer while facing this shortened inventory crisis. This seems to be pretty straightforward but there are other idiosyncrasies involved and when it all comes down to it, their buyers' options are just being limited more and more. This means that not only will it be harder to find your dream home with all the features you would want, it also means that you will have to pay more for these said amenities. It's also imperative to note that when a buyer does find a home that fits their needs, they need to pounce quickly. With so few homes on the market buyers are competing not only on price but on speed as well. The best news to come out of this for buyers is the previously mentioned lower mortgage rates that are running around, but with such inflated prices for homes, it's not really an overall savings
As much as being a buyer in today’s market can be daunting, being a seller in today's market puts one in a great position. The market over the last few years has increased close to 30% of its value. Not having the inventory on the market is a major driving force in this. Stated in the above paragraph, buyers and investors are quick to gobble up homes off the market; meaning, if you are selling be prepared to move quickly. That, in turn, brings up the one negative aspect of being a seller in the current market: Once you choose to sell, you are more than likely also becoming a buyer and have to jump into the other side of the market that is having struggles.
Being an investor with limited inventory has also seen some benefits. With such a hot sellers market, many have chosen to sell their homes and start renting or leasing properties, which means more potential clients for landlords. Also, not necessarily derived from the low inventory problem but the aforementioned lower mortgage rates are obviously nice for any investors to grab up more property.
Update (5/29/22): Since we've posted this blog mortgage rates have bounced from their low rate in 2020 back up to the highest they have been in over 10 years recently and are currently floating around the plus 5% mark. With this new development it clearly makes it more difficult as a buyer and investor both but in turn should start to see the inventory to bounce back now as well.