How A Low Housing Inventory Impacts The Real Estate Market
Carla Ayers4-minute read
November 24, 2022
Buying a house is an exciting event, but many Americans are struggling to find the home of their dreams due to the real estate market’s lack of options. Low inventory is plaguing communities across the country.
What Does ‘Low Housing Inventory’ Mean?
In the early months of 2020, many people were sent home to quarantine by their employers due to COVID-19. The pandemic forced many people to work from home, while some lost their jobs altogether. Schools switched to remote learning and many people found themselves working and learning from their home.
This shift in lifestyle left a lot of people reluctant to sell their home because they were unsure of their future. Homeowners who planned to sell their home in 2020 chose to stay put and weather the uncertainty in familiar surroundings. Housing market predictions for 2022 anticipate that the work-from-home trend will stick around as working professionals in cities relocate to quieter areas of the country.
At the same time, builders stopped building. Lumberyards stopped producing building materials because they had no skilled workforce to generate inventory. Building supplies were scarce and their prices astronomical.
Existing homes weren’t being sold and no new homes were being built, thus resulting in more demand and not enough supply.
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Why Is Housing Inventory So Low?
A few key factors play a part in low inventory. The COVID-19 pandemic forced a lot of lifestyle changes and historically low interest rates had home buyers and sellers in a frenzy.
One of the largest contributing factors was record low mortgage rates.
Record Low Interest Rates
In the last year, mortgage interest rates averaged 2.65% for a 30-year fixed-rate mortgage, which is lower than 2019’s average of 4.51%. Many existing homeowners took advantage of the dip in interest rates and refinanced their home with plans to stay put in their existing home.
As time progressed, some homeowners were given the choice to work remotely on a permanent basis. Many families chose to relocate to more affordable communities with more variety in housing options, land, space and proximity to family and friends. Small suburban communities saw an increase in population.
These “Zoom towns,” once considered commuter towns, are experiencing their own inventory shortages because of the influx of remote workers coming into the area with hefty down payments and the ability to pay over the asking price for homes.
Investors Purchasing Inventory
Average homeowners haven’t been the only ones buying homes throughout the past few years. Investors have also been taking advantage of the lower-than-average interest rates and have been buying up available inventory. This has increased competition for traditional home buyers by further reducing the number of homes on the market.
Fewer New Construction Homes
Another major factor contributing to low inventory is lack of new builds. New construction plays a vital role in the number of homes that are sold in a year. Builders have struggled with unstable building supply costs and a lack of skilled tradespeople to build new homes. Permits for new builds were behind by 24% in 2020 and have not yet recovered in 2022.
The lack of consistency in building supplies and skilled workers made it nearly impossible to make a profit on entry-level new home sales.
Some Sellers Aren’t Listing
Savvy sellers know that the lack of available inventory will affect them once they’re on the other side of the home buying process. Because of this, many homeowners who were planning on selling their homes have decided to hold off until the market stabilizes.
The Impact Of A Low-Inventory Market
With historic low interest rates, potential new homeowners are entering the market excited but finding a lot of disappointment.
There are fewer homes for sale, sometimes resulting in months of searching, dozens of showings, and rejected offers.
Some buyers have had to compromise on the size and features they require for their new home. The lack of affordable homes is the biggest challenge many potential homeowners face.
Many homes are selling extremely fast and far above asking price. Buyers on a strict budget have little room for negotiation and repairs.
It’s a “seller’s market” but being a seller is hard, too. While a homeowner can sell their home faster and at a higher price, the real struggle begins when they need to find a home that fits all of their needs, in their specific time frame.
Real Estate Investors
This is a great market for experienced real estate investors to improve their existing property portfolios.
With lower mortgage rates and rising property prices, it’s been an opportune time to sell investment properties that aren’t performing as well as others. This is a great time to sell assets, recover costs and potentially make a profit sooner than anticipated.
Many landlords are taking advantage of the unstable housing market and improving their rental listings with upgrades and repairs that meet or exceed market standards.
Sellers have sold their homes for the most value they can and are looking to lease until the market stabilizes. Many baby boomers have retired and downsized during the pandemic and are choosing a more maintenance-free life that a home rental can provide.
How Long Will The Housing Shortage Last?
We have seen housing inventory shortages before. A shortage occurs when there is only a 6-month housing supply. It typically takes 4 – 6 months to rebuild the real estate market supply.
However, it will take years before we know the damage done to the housing market caused by COVID-19.
The Bottom Line
It’s not all doom and gloom. Your mortgage lender will give you guidance on what kind of properties you can purchase and for what price. Working with a well-connected and experienced real estate agent or REALTOR® can save a lot of heartache and disappointment.
Buying smart is possible. Just be sure to have a great network of real estate professionals you can lean on for advice and guidance.
If you’re looking to get preapproved and start your home search, visit Rocket Mortgage®.
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