Can’t Find A Home To Buy? Why Housing Inventory is Low

I’d like to preface things by saying that every market, state, county and city is different. More so than that, different price points come with different types of buyers. So while you might be living in a town with several million dollar home listings, I’d like to focus on the types of homes that the largest share of home buyers are in need of. According to the National Association of Realtors, 34% of buyers are 36 years old and younger and of these individuals, 66% of them are first-time buyers. The next biggest share of homebuyers are ages 37 to 51, making up 28% of buyers.

Historically, persistently weak participation of first-time buyers would suppress home purchase activity. So much so that the government even introduced a first-time homebuyer tax credit from 2008 to 2010 to spur growth and help battle the economic crisis, but the demand was restrained by high unemployment and declining income. However, as the labor market continues to heal and young-adult incomes have begun to recover, participation is no longer an issue. The inventory of “starter homes” is the issue. [A starter home is one that falls at the lower end of the home price distribution and typically less than 2,000 square feet. Prior to the housing bubble, 71% of homes owned by first-time home buyers were less than 2,000 square feet. – Fannie Mae]

So why is inventory an issue?

Many starter homes have shifted from owner occupancy to rentals. In part, this is a product of existing homebuyers losing some equity during the housing collapse and while they are ready to move up to their next home, they aren’t ready to sell until some of that lost equity returns. We’ve also seen the cost of renting go up. With the economic downturn and foreclosure crisis, many people who damaged their credit are not yet able to purchase a home. With heightened rental demand and higher rents collected, there is more of an incentive for move-up buyers to lease out their property in lieu of selling. Fannie Mae reports that between 2005 and 2013 (the most recent year for which data are available) the inventory for owner-occupied starter homes has declined by more than 1 million units, whereas the inventory of renter-occupied starter homes rose by 2 million. In addition, analysis finds that home builders have moved away from building new starter homes, dropping from 40% to 32% over that same time span.

In turn, the tight starter home supply and associated rapid price gains in the lower tiers of the home sales market are reducing first-time homebuyer affordability. This leaves a very specific home at a very specific price point for the largest share of people in the market for purchasing. So what can you do as a first-time homebuyer? Be prepared. Get your pre-approval lined up. Go over your options with your lender. Work with your lender and your realtor to put a home buying plan in place so you are ready to make an offer when the right home that’s the right fit for you comes to market.

Written By: Chris Ulrich – United Home Loans
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