In recent years, the issue of real estate inventory shortage has become a concern, affecting potential buyers and sellers. The lack of available housing options has led to skyrocketing prices, bidding wars, and a sense of frustration among those seeking a place to call home. But why is the real estate market slowing down in 2023? And where have all the houses gone?
In this blog, we’ll delve into the underlying causes behind the scarcity of housing and explore the various factors that have shaped the housing market landscape in 2023. From the aftermath of the COVID-19 pandemic to economic influences, we will examine the interplay of these elements that have resulted in a lack of housing inventory.
What Is a Low Housing Inventory?
A "low housing inventory" refers to a situation where the number of available homes for sale or rent is significantly below the demand from potential buyers or renters. It signifies a shortage or scarcity of housing options in each market or region. When there is a low housing inventory, the available supply of homes cannot keep up with the demand, leading to increased competition among buyers or renters, rising prices, and limited choices. This imbalance can create a challenging environment for individuals and families trying to find suitable and affordable housing, often resulting in frustration and difficulty securing a home that meets their needs.
Why Is Real Estate Inventory So Low?
So, is the real estate market slowing down? Why is home inventory so low? The housing market slowing down is due to several key factors. The COVID-19 pandemic has triggered significant lifestyle changes, while historically low-interest rates have created a frenzy among home buyers and sellers.
Record Low-Interest Rates
A significant contributing factor to the current low housing inventory nationwide is the opportunity many homeowners had to secure historically low-interest rates in 2020 and 2021. However, since then, mortgage rates have experienced a substantial surge. According to Freddie Mac, the rate for a 30-year fixed mortgage soared to 6.7% on March 9, nearly doubling from the previous year.
As a result, homeowners who purchased or refinanced their homes at low-interest rates are now hesitant to sell and buy another property that would entail a significantly higher mortgage interest rate. The substantial increase in interest rates has created a sense of reluctance among these homeowners, who prefer to hold onto their current homes rather than take on a new mortgage with much higher interest rates.
A Decline in New Construction Homes
The lack of new construction is another significant factor contributing to the low housing inventory. New builds play a vital role in the number of homes sold each year. However, builders have faced challenges due to unstable building supply costs and a shortage of skilled tradespeople to construct new homes. As a result, permits for new builds fell behind by 24% in 2020 and have yet to fully recover by 2022.
The lack of consistency in building supplies and skilled workers has made it nearly impossible to generate profits from selling entry-level new homes, further exacerbating the scarcity of available housing options.
Remote Work and Relocation
As the COVID-19 pandemic progressed, remote work became a permanent option for some homeowners. This shift allowed many families to relocate to more affordable communities that offer a wider range of housing options, larger plots of land, more space, and proximity to family and friends. Consequently, once considered commuter towns, small suburban communities experienced an increase in population.
These newly coined "Zoom towns" are now facing their own inventory shortages due to an influx of remote workers who bring substantial down payments and a willingness to pay over the asking price for homes, creating a highly competitive market.
Sellers Delaying Listings
Savvy sellers are aware that the shortage of available inventory will impact them when they transition to becoming buyers. Consequently, many homeowners who had initially planned on selling their homes have chosen to hold off until the market stabilizes, contributing to the low housing inventory.
Investors Acquiring Inventory
Beyond average homeowners, investors have taken advantage of the historically low-interest rates and actively purchased available inventory. This heightened investor activity has intensified competition for traditional home buyers and further reduced the number of available homes.
How Does the Low Housing Inventory Affect Buyers and Sellers?
The effects of low housing inventory are felt by both buyers and sellers in the real estate market. However, it is the buyers who tend to experience the greatest challenges. Insufficient housing options have created a highly competitive market where numerous buyers are struggling for a limited number of available properties. This situation often leads to intense bidding wars and drives up home prices.
Buyers
Buyers have the worst of this predicament as they face a scarcity of options and heightened competition. Due to the limited inventory, some buyers have had to compromise on their desired size and features when it comes to finding a new home. The lack of affordable housing options poses the most significant hurdle for many aspiring homeowners.
Moreover, homes are selling at an astonishingly rapid pace and frequently above the asking price. Buyers with a strict budget find themselves with little room for negotiation and may face difficulties addressing necessary repairs or improvements because there are no homes for sale.
In such a market, sellers have the advantage of choosing from a pool of prospective buyers and may prioritize those willing to waive contingencies and accept terms that heavily favor the seller. This imbalance of power and limited buyer protections can leave buyers with little negotiating power and make the home-buying process more challenging.
Sellers
On the other hand, while it is often referred to as a "seller's market," being a seller comes with its own set of challenges. Many potential sellers find themselves unable to list their homes due to the financial constraints of affording a new property at current mortgage rates. Consequently, homeowners who desire to downsize, upgrade from a starter home, or relocate to a different area are forced to wait, keeping their homes out of the inventory pool.
While homeowners can sell their properties more quickly and at higher prices, the true struggle arises when there are no houses on the market, and they need to find a new home that fulfills all their requirements within their desired timeframe.
Is This the End of Real Estate?
No, this is not the end of real estate. And many of you may be wondering, will housing prices drop?
Past instances of housing inventory shortages have been observed in the real estate market. Such shortages are typically defined by a limited housing supply that would last for only about six months. Historically, it has taken approximately four to six months to recover the inventory and restore balance to the market.
Nevertheless, the long-term consequences of the COVID-19 pandemic on the housing market are expected to unfold over several years. It will take an extended period before the full extent of the damage caused by the pandemic becomes evident, and its impact on the housing market becomes clear.
While lower interest rates have the potential to offer some relief, they are unlikely to completely resolve the problem. Increasing the overall number of housing constructions could also help, but the persisting challenges of high material costs and labor shortages, which stem from the ongoing pandemic, may continue to deter builders from initiating new projects.
According to housing market experts, recovering from the current housing shortage in the U.S. is expected to be a prolonged process. Constructing homes requires both time and capital, and there are additional factors that come into play. Unfortunately, there is no quick fix or immediate solution available. Due to the intricacies surrounding the issue, the current housing shortage will probably persist for a considerable period.
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Written and Published by: VanEd
