Why is home inventory so low?
Spring is typically the time when new listings are popping up on the market like so many daffodils in a meadow, but this hasn’t been the case for some time.
Inventory of available homes on the market is the lowest it’s been in two decades, but the reasons may surprise you. Two of the likely culprits are baby boomers and homeowners who are simply satisfied with their home and see no reason to move.
Baby boomers are showing a desire to age in place in their current homes, and their refusal to sell is creating a clog in the market. Eighty-five percent of baby boomers surveyed recently say they are not planning to sell their home in the next year.
That means 33 million properties — many of which are urban condos or suburban single-family homes — will stay off the market.
Many of those properties would be popular choices for millennials, a generation still largely waiting in the wings to break into homeownership. A strong economy and rising home prices has created very little reason for established homeowners to sell in the short term. Although downsizing might be on their minds, Boomers face the same inventory shortages and price increases plaguing millennials.
As home inventory sits near post-recession lows, there are many hypotheses on why there are so few homes for sale today.
Here are the leading theories: (1) investors bought up too many foreclosures during the bust and are hoarding them as rentals, (2) rising prices have made buying a home unaffordable, (3) owners don’t want to sell if they don’t think they can buy another home, (4) too many home-owning boomers can’t or don’t want to move, and (5) owners who want to trade up can’t find an affordable home at the next level.
The survey further concluded that 63 percent of respondents indicated that their current home met the needs of their family. They cited low interest rates, recently purchasing their home, and needing to make home improvements and low property taxes, as reasons not to sell.
Older households – by hanging on to their homes – aren’t necessarily driving down inventory, at least not yet. Every one percentage point increase in the housing stock owned by those aged 55 and over is, on average, correlated with inventory that is actually 3.6% higher.
There may be hope that more starter homes will hit the market soon. Possibly offsetting the low supply of starter homes, which is down 17 percent year over year, 60 percent of respondents to that realtor.com® survey who did say they plan to sell in the next year are millennials who want to move to a larger home or one with nicer features as they had to make do with a smaller house or condo to start with.
Survey data revealed that the market may see more of these homes hitting the market in the next year, but whether these owners actually list will depend on whether they can find another home.
The real estate market has faced a unique set of circumstances from 2012 to today, all leading to a dramatic decrease in overall housing inventory. But what’s causing the massive shortage? Let’s take a look at the key factors driving this nationwide real estate trend.
Many people start with the builders. Report after report says construction has slowed way down and there aren’t enough new developments.
Homebuilding’s impact – or a lack of it in some places – is by far and away the biggest influence when it comes to inventory woes, outweighing other explanations by a large margin.
New home construction is strongly related to inventory. Every one percentage point increase in a market’s housing stock between 2010 and 2016 is, on average, correlated with inventory that is approximately 13% higher.
While that may have a mild impact, the real issue exposed by a recent Trulia report and examined by USA Today suggests that there are a variety of additional factors working in tandem to create an inventory shortage.
High prices are squeezing out mid-level home buyers:
A wide price gap between mid-level starter homes and next-level-up homes is creating a much different scenario. What’s happened is, young or first-time buyers invested in a mid-level starter property several years go. Fast forward to today; those homeowners are ready to upsize and are looking to purchase a larger home, only to find that they can’t afford one.
The increase in housing costs and the equity built in inexpensive starter homes purchased years ago leaves would-be buyers at a loss. Instead of moving up, they’re battening down the hatches and staying put in what was meant to be their starter home.
Second, first-time buyers are struggling to get into the market:
Because starter home buyers are unable to move up the next tier, their homes are locked up and are not re-entering the market. That means, young buyers who would be purchasing starter homes continue to rent because there’s no inventory in their price range to invest in.
This is especially prevalent in cities in the south and west portions of the country. The shortage is also causing price hikes across the board. In fact, the level of demand has caused the US median home price to increase by a staggering 8.2% in just one year. That’s more than enough to block out aspiring homeowners working with limited funds.
Third, a portion of homeowners are still underwater:
Unfortunately, a lot of buyers who went into the market pre-crash are still recovering from the financial losses they faced when the market bottomed out. Whether that’s because they had to refinance or take out a second mortgage or their home value simply hasn’t recovered because they’re in a slower-to-heal market, many are still underwater on their homes. That means there’s another subset of homes that won’t be hitting the market anytime soon.
Fourth, cash buyers are holding on to lucrative rental properties:
When the market crashed, foreclosures were everywhere and it was a great time to be a real estate investor in a position to buy. Today, those investors are enjoying the ongoing cash flow provided by low-cost homes they snatched up at rock bottom prices.
Since rental demand is so high and investors are making good money, there’s no incentive for them to sell. That means a huge portion of the inventory that would normally be accessible to first-time and trade-in buyers is off the market for the foreseeable future. In fact, research shows that over a third of all starter homes are currently owned by US investors.
What can be done to solve the issue?
The key to fixing the issue is to address the widening price gap between mid-level starter homes and next-level-up homes.
In 2016, the median list price of a premium home across the nation was $542,805. To contrast, the average price of a mid-level starter home was $267,845. Unless that gap becomes smaller, starter home buyers are going to continue to struggle to move into a nicer property because they can’t afford it – plain and simple.
This is a relatively new problem. The price gap between starter and next-level-up homes increased by a national average of 17.3% between 2012 and today. As with any real estate trend, some markets and buyers are feeling the effects far more significantly than others.
It’s also important to note that this issue doesn’t stop with the housing market. It’s deeply rooted in US economics and wage disparity. The middle class is disappearing and the wealthiest Americans are getting wealthier.
That, in turn, is impacting the price of premium homes, creating an even larger population of middle-class Americans who can no longer afford to invest in higher value properties.
The silver lining for homeowners & real estate investors:
If you live on the west coast or in another area with crazy high housing demand, you’re in a great position to sell and make a killing at closing. This is especially valuable if you’re looking to move to a more affordable market.
As for investors or homeowners looking to make some extra money, it’s the perfect time to take steps towards generating passive income with rental properties. While you won’t be helping to solve the low inventory issue, you will have a guaranteed source of income for the foreseeable future.
Investor ownership is tied to lower inventory. Every one percentage point increase in the housing stock owned by investors in a market is, on average, correlated with inventory that is 2.8% lower.
The insights highlighted in this study provide a unique, thoughtful look at the cause and effect of the current US market inventory shortage. Though this data provides some answers to the questions we have today, the housing market is fluid.
In due time, the economy will shift again and we’ll be faced with a new set of market conditions and all the questions that come along with it
The takeaway is that not all explanations for low inventory fully explain why the national home inventory is at or near historic lows. While our modeling of all five of the above theories are not definitive, they do provide a step forward in explaining which explanations matter most. It turns out the leading explanation for low inventory is that investor activity and a lack of homebuilding are both significant predictors of low inventory. On the contrary, home value recovery and price spread play a much smaller role while an aging population plays a countervailing one.
The silver lining from these results are that homebuilding and investor activity are factors that could be made more attractive through a combination of strategically targeted land use, tax, and financial policies.