Why is Housing Inventory So Low?
Low housing inventory has created competitive real estate markets throughout the U.S., and Mid-Michigan is no exception. Many homeowners who had been considering selling their home and upgrading have reconsidered, concerned they won’t be able to find a new home that’s right for them. Knowing how low housing inventory happened can help us know what to expect, and whether or not second-time home buyers can still find their dream home.
7 Reasons for Low Housing Inventory
1. Slow to Bounce Back
While a seller’s market has taken firm hold in 2018 in most areas across the U.S., including Greater Lansing, home building was slow to bounce back after the real estate downturn in 2008. Overbuilding, where more homes are built faster than new families emerge, peaked in 2007 and the real estate fall quickly followed, leaving an overstock of homes on the market for a number of years. The accompanying turbulence in the financial market pulled many home builders out of the industry and started an eight-year-long underbuilding period. Americans kept forming new families, but new homes weren’t built.
Not until the end of 2017 did building rates finally outpace new households again, and high demand for new homes has pushed building rates even higher in 2018. These new homes will help to balance the market in the coming years and remove the shortage that began with the real estate industry fallout.
2. Fewer Starter Homes
While builders have re-entered the market and new home constructions are rising, not all types of homes are getting the same attention. Starter homes—the smaller, more affordable, homes on the market—don’t provide a very high payoff for builders, which means builders don’t have a very high incentive to build them. This is especially true when the alternative is building new, more expensive homes with more luxuries and higher profit margins. And, second-time home buyers looking for their dream home are generally less willing to compromise on amenities and space, while first-time buyers will take a lower price over the latest luxuries.
This has created a top-heavy real estate market with especially low housing inventory in starter homes. While demand for starter homes has grown relative to larger homes (at the same rate as emerging families), starter home supply has not increased, causing many starter homes to rise in value at a faster rate than some larger homes.
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3. Business Case to Build
The business case to build homes isn’t only concerned with size either, and this is another factor contributing to low housing inventory. Building homes, especially subdivisions and groups of homes, requires a big investment–and if it doesn’t pay off, home builders lose money. This means every home builder must make a business case for investment before they decide to buy and develop land. This analysis includes finance factors, like how easy or difficult it will be to get a loan and what rates are available, as well as market factors, like how many people in the area want to buy a home and how much they will pay.
For many home builders, this means targeting the most lucrative markets where home values and populations are rising fastest, and land speculation is high, usually in big city suburbs such as those around Detroit or Chicago. As builders target these high-demand, high-payoff areas first, other areas around mid-sized cities like Lansing endure low housing inventory for longer periods.
4. The Buy and Build Delay
When demand increases for an item that is relatively easy to make, suppliers can react relatively quickly. However, nothing requires a larger investment or more time to build than a home. Home builders first need to make a business case for development, get financing, buy the land, and then develop it. In between they generally have to unravel yards of red tape including building codes, zoning restrictions, neighborhood ordinances, and more. This means, even when builders see buyer confidence returning and decide to build again, there’s a years-long delay before any change in supply occurs. The current low housing inventory state is partially the result of this long building cycle, though these delays are now beginning to close and new homes are coming on the market.
5. Nervous Sellers
Housing inventory includes new homes as well as buyers that sell their first home. However, many current homeowners are reluctant to enter a competitive housing market. Though they will get a good price on their first home, buyers wonder if they’ll be able to find a new home that suits them. It’s easier for many to stay with a sure thing, even if they may not have enough space and they have the equity for a much larger home.
As more homeowners see the housing market favoring their position—a desirable, high-value starter home with increased equity as well as ideal new constructions—more starter homes are likely to enter the market again.
6. Later Homebuying Age
According to a 2017 survey by the National Association of Realtors, the biggest group of homebuyers are less than 36 years old, and the average age of these buyers is 31. Compared to previous generations who started families and purchased homes in their twenties, Millennials and the new Generation Y are coming of age later. This translates to belated demand by what is now the biggest home buying group, and ultimately contributes to the recent rush on homes. As this newly home-ready group rushes to enter the market, they’ve begun to price each other out.
7. Investment
Seeing valuable opportunities in starter homes, many homeowners are renting out their starter homes instead of selling them, further restricting the already low housing inventory in starter homes. Starter home buyers that would have purchased these homes before are now renting instead, often paying more in rent than they would for monthly home loan payments. Many of the original homeowners, including Generation X and Baby Boomers, move into homes they previously purchased for investment, vacation or retirement purposes before demand increased to its current level.
Home builders will continue to build new homes (and at faster rates) for at least the next five years, which will ease the pressure caused by low housing inventory. For 2018, the real estate market is still competitive for all buyers, but more competitive for starter-home buyers than any other group. Many first-time homebuyers are opting to save more and choose longer mortgage terms in order to skip straight to their dream home. Second-time homebuyers who see high demand in the market are leveraging the equity in their starter home to outcompete other buyers and claim their dream home. Every buyer, regardless of generation of life stage, has to weigh their options individually to find the best solution for them.