Source: Yahoo Finance
Last year, mortgage rates dominated the housing narrative. Now the main actor appears to be inventory. That’s the takeaway from a host of data points revealed in the last week such as the unexpected increase in home prices and the unforeseen drop in pending sales. Underpinning all these metrics is a housing market devoid of enough homes for sale. Mortgage rates play a significant role in the inventory story. A major reason is that there aren’t enough homes for sale as homeowners aren’t listing their homes. This then leads us to a shortage of housing.
New listings of homes for sale declined 22.4% nationwide from the previous year during the four weeks ended April 2023—one of the largest declines since the start of the pandemic. Why does the housing market currently experiencing a shortage? Rising materials costs, supply chain issues, and labor shortages have all negatively impacted housing inventory. But the problem existed long before the pandemic. As a matter of fact, the United States failed to keep up with the housing demands of a continually increasing population.
One factor that exacerbates the shortage is the prevalence of institutional investors, who buy up a large portion of housing inventory for profit. These investors accounted for more than 13% of all residential real estate purchases in 2021. Approximately 82% of potential move-up buyers said they felt trapped by their current low mortgage. Doug Duncan, the Chief Economist at Fannie Mae said that the challenge for the sellers is if they sell today, they are likely to have to take a higher interest rate if they are going to buy another house. What it means for buyers is that they will have an even harder time finding a house to buy. Indeed, pending home sales for March dropped by 5.2% from the previous month, a bigger drop than expected, according to the National Association of Realtors.
Traditional wisdom states that the real estate market needs 5 to 6 months of housing supply to be balanced, or not leaning toward either a buyer’s market or seller’s market. Complicating the problem further is the tendency of particularly popular markets to draw in new residents faster than they can create new housing to accommodate them. Both buyers and sellers feel the impact of insufficient housing inventory. Many would-be sellers are unable to list their homes because they afford the price of a new one at the current mortgage rates. As a result, a lot of homeowners who would prefer to downsize, or graduate out of a starter home, or simply move to a new location, are waiting it out. That keeps those homes out of the inventory pool.
Buyers are likely to bear the brunt of the problem, however. A lack of housing options creates a very competitive market, in which many buyers must compete for few available properties. This often results in bidding wars and drives up home prices. It can also leave buyers with little power and fewer protections in the transaction, as sellers have their choice of other hopefuls who might be willing to waive contingencies and accept any terms the seller wants.
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