13 Mar 3 Reasons for the Low Inventory in Real Estate and Why It Matters
There are 3 big reasons why there is low inventory. The amount of inventory greatly affects the market. It’s the age-old principle of supply and demand. Inventory affects the prices and process of real estate; prices rise and the process becomes faster paced.
3 reasons for the low inventory
- The long term recession of 2007-2013 took home prices down so low and for so long that many people skipped a move entirely. For example, someone with kids who were 8 and 11 at the start of the crash and wanted to sell their small starter home to buy a larger home. By the time their home regained enough value to justify selling, their kids were then 15 and 18 and there really wasn’t a reason to buy a big home just to empty nest in a few years. Many people never upgraded and just skipped this phase of real estate. As a result, this lowers the number of starter homes on the market.
- Empty nesters are staying in their homes longer. This is partly because during the crash builders stopped building luxury townhomes. They haven’t returned to building them in mass. One reason is luxury townhomes are expensive and builders are already in a precarious place in their business. Many empty nesters wishing to downsize their space and real estate equity are having a hard time finding options. This means they are staying in their homes longer leading to lower inventory in the luxury homes category.
- Interest rates are the third reason. The small rise in rates is having an impact. Many homeowners are locked into a 3%-3.75% interest rate and when rates hit 5%, in late 2018, they decided it was too expensive to move up. Rates have since adjusted back down to 4.5% -4.75%. Still, the fluctuating rates are having an impact on the level of inventory.
New construction usually fills the niche during times of low inventory. Currently, new construction homes are near twice the median price in our area! As I mentioned, builders have their own struggles right now. New construction prices are heavily dependent on the 5 L’s of new construction. These are Land, Labor, Laws, Lumber, and Lending. The increase in costs associated with the 5 L’s have driven prices beyond what many can afford.
Why it matters
This chart is a good visual representation of how low our inventory of homes is right now. We usually refer to our “balance point” being at about 22,000-24,000 homes on the market here in the Twin Cities Metro area. As you can see, back during the recession our inventory levels climbed to 34,000 during 2008 and 2009. We are now as low as we’ve ever seen the inventory with just about 7,900 homes on the market! The graph doesn’t even go low enough to reflect that number. Last year, at this same time, our inventory was at a level of 8,400.
This matters because it means prices are likely to keep rising and the Spring Market will certainly include multiple offers on the less expensive ‘ first-time buyer’ style homes. If our inventory stays super low, the multiple offer situation could even extend to higher valued homes. This has been the pattern over the last 3 years at this time in the Spring Market. It’s interesting because the low inventory actually holds back sales of the homes which are listed in the $400,000+ price ranges. It does this because buyers for homes of this price are not confident to list their lower priced properties. Many are nervous if they list their home, which is in the $200-$300K price range, it will sell quickly and they will not have enough choices available to find a suitable home.
It’s still early and it’s been cold out there!
In the past 3 years, this pattern was broken when the weather warms up and inventory of homes flood on the market. I was hoping we would have seen the pattern start to break by now, but with all the snow and polar vortex, we’ve been delayed. With warmer weather right around the corner, we will have more homes to select from soon!
Be sure to read some of my other blog posts including:
If you have any questions, please let me know, I’m always happy to help. You can give me a call at 612-889-6496 or send an email to [email protected].
Get a Virtual Price Opinion from Sheryl!