Low Housing Inventory: Navigating the Market Challenges

Low housing inventory is probably not news to anyone who’s looked to buy a home recently. According to the National Association of Realtors (NAR), the supply of homes for sale in the U.S. — typically measured in months of housing supply — reached a record low of just 1.6 months in January 2022. While that number has grown since, the supply is still not nearly enough to meet the demand. In this article, we will discuss the factors causing the shortage and its effects on buyers and sellers while offering strategies for navigating this challenging market.

Understanding Low Housing Inventory

Low housing inventory refers to a situation where the supply of homes available for sale is insufficient to meet the demand of prospective buyers.

Pandemic-Induced Demand: The COVID-19 pandemic spurred a surge in home buying due to low mortgage rates and remote work opportunities.

Supply Chain Disruptions: Rising materials costs, supply chain issues, and labor shortages stemming from COVID-19 negatively impacted housing inventory.
Great Recession Impact: The Great Recession of 2007-2008 had a severe impact on homebuilding, causing new construction to drop dramatically. Although it has been slowly recovering, new builds still haven’t caught up to pre-recession levels.
Investor Influence: Institutional investors have exacerbated the shortage by purchasing homes to flip or rent for profit. In December 2022, large investors bought more than 8% of available homes, according to Realtor.com.

Interest Rate Complications: Higher mortgage rates have reduced purchasing power, pushing many hopeful buyers out of the market and keeping sellers from listing their homes to avoid giving up locked-in low rates.

Effects of Low Housing Inventory on Buyers

Buyers are feeling the impact of low housing inventory in several ways:

Rising Home Prices: With high demand and limited supply, home prices continue to rise.

Bidding Wars: Multiple offers on homes have led to fierce bidding wars, driving up prices.
Limited Choices: Buyers often compromise on their wish lists due to a lack of available options.

Effects of Low Housing Inventory on Sellers

While low housing inventory poses challenges for buyers, sellers can reap the benefits:

Higher Sale Prices: Sellers often receive offers above their asking prices.
Quick Sales: Homes typically spend less time on the market.
Favorable Terms: Sellers can negotiate terms like rent-back agreements that suit their needs.

Navigating the Market in a Low Housing Inventory Era

For Buyers:

Get Pre-Approved: Being pre-approved for a mortgage gives buyers a competitive edge.
Expand Your Search: Consider homes outside your preferred neighborhoods or those needing minor renovations.
Work with a Real Estate Agent: An experienced agent can help identify listings before they hit the market.

For Sellers:

Stage Your Home: A well-presented home can attract more offers and higher bids.
Negotiate Terms: With multiple offers, sellers can negotiate favorable terms like longer closing dates or rent-back agreements.
Consult Market Data: Understanding current market trends can help set a competitive asking price.

How Long Will the Shortage Last?

Given the complex nature of the situation, the current housing shortage is likely to persist for some time. Although lower interest rates may help, that alone is unlikely to solve the problem completely. Increasing new housing builds would also help, but high materials costs and labor shortages continue to be obstacles.

In March 2024, new residential construction starts were down 4.3% from the previous year and 14.7% from the previous month, according to joint data from the U.S. Census Bureau and HUD. Sean Roberts, CEO of Villa, a homebuilding platform, says, “It could take a while for the U.S. to recover from the current housing shortage. Houses take time and capital to build, plus, there are other factors at play. Unfortunately, there is no short-term solution.”

Back to the '70s: Exploring Parallels in Today's Housing Market

In the 1970s, the United States faced a unique economic challenge known as stagflation. This period was marked by stagnant economic growth coupled with soaring inflation rates.

Low housing inventory continues to shape the real estate market, making it a challenging landscape for buyers while offering advantageous conditions for sellers. By understanding the dynamics of this market and adopting strategic approaches, buyers and sellers can navigate the challenges and opportunities presented by low housing inventory.