Why are there so few homes on the market?

The most common question I get from buyers these days is “why are there so few homes on the market?”

In most neighborhoods and price ranges, housing inventory is at an all time low. And that’s after years of declines. Couple that with prices at or near all time highs and mortgage rates at multi decade highs.

Some buyers are mistakenly planning to wait things out until rates or prices go down and inventory goes up. That’s probably not the best strategy for a multitude of reasons. To start with, there is huge pent up demand and once the many buyers currently on the sidelines jump back in, chances are that prices will go up. And even if they don’t, we may see a repeat of 2021 when there were multiple offers on virtually every listing and buyers had to waive many contingencies in order to get into escrow.

So how did we get here?

HOME OWNERS LOCKED INTO LOW RATES

With everyone who could refinance when rates were low having done so, plus the buyers who bought at that time having mortgage interest rates that we most likely will never see again, potential sellers are locked into “golden handcuff” mortgages. Think of it as a lock-in effect.

Even if someone were to buy a replacement property at the same price as their sale (which isn’t likely), the monthly payments would in many cases be almost double. And this covers a vast number of the homes in the US. How many? Check this out.

When you also factor in the 20.3% between 4-5%, that’s 90% of the homes with mortgages! It’s also why many economists have pegged 5% and lower rates as the tipping point for when more homes come on the market. Unfortunately, as of this posting, it’s looking more likely that we see 8% rates than 5% anytime soon. (Currently, depending on the product, credit score, down payment etc, 6.75%-7.5% is where most are winding up.)

UNDER BUILDING OF NEW HOMES

I remember hearing during the financial crisis in the late aughts that once the foreclosures and short sales ended, there would be a shortage of homes for sale in California because enough new homes weren’t being built. And looking back, for the most part inventory has gone down and prices have gone up for over a decade staring in late 2011.

For 14 straight years, home builders didn’t construct enough homes to meet the historical average (shown in red below). That under building created a significant inventory deficit. And while new home construction is getting back on track and meeting the historical average right now, the long-term inventory problem isn’t going to be solved overnight or anytime soon.

The graph below shows new construction for single-family homes over the past five decades, including the long-term average for housing units completed:

In many of the markets I cover from the beach to the desert, townhomes and condos represent a large segment of the market. A graph for those property types would look fairly similar.

ECONOMIC UNCERTAINTY

When people aren’t confident about the future, the tendency is to stay put and do nothing. We’ve heard that a recession is coming for a few years right now (although thankfully it hasn’t happened) and there’s been a drum beat of prices will tank - even though they have gone up. A lot of this is, of course, fueled by media misinformation.

“In the absence of trustworthy, up-to-date information, real estate decisions are increasingly being driven by fear, uncertainty, and doubt.”

IS THERE ANY GOOD NEWS?

Yes. Over the past few months, inventory has been ticking up just ever so slightly.

It’s well known that the busiest time in the housing market each year is the spring buying season. That’s why there’s a predictable increase in the volume of newly listed homes throughout the first half of the year. Sellers are anticipating this and ramping up for the months when buyers are most active. But, as the school year kicks off and as the holidays approach, the market cools. It’s what’s expected.

But here’s what’s surprising. Based on the latest data from Realtor.com, there’s an increase in the number of sellers listing their houses later this year than usual. A peak this late in the year isn’t typical. You can see both the normal seasonal trend and the unusual August in the graph below.

But, even with more homes coming onto the market, the market is still well below normal supply levels. And, that inventory deficit isn’t going to be reversed overnight.

Sometimes in life and quite often in real estate, we have to hold two thoughts in our head at once.

For the current housing market, the two thoughts are:

• Home owners are locked into historically low rates and aren’t inclined to sell.

• Life goes on and family formation and growth, job transfers, divorce, death, economic reversals and other changes continue to happen no matter what the rates are.

And that’s who is in the market and selling these days. I call it the “have-to” sellers and buyers.

HERE’S WHAT YOU NEED TO KNOW

BUYERS: rates are high now but chances are fairly high that they will drop over the next few years. That means that you most likely will be able to refinance once or more over the time you might own the property. If you wait, even if rates go down, that will result in prices going up. I’ve heard it said that you “marry the house and date the rate” (cute, right).

SELLERS: chances are you won’t have much competition right now. That means that you may be able to negotiate better terms such as “as-is”, no repairs, free leasebacks and shorter contingency periods.