Explaining Today’s U.S. Real Estate Inventory Insanity

Have you ever found yourself walking down the street on a rainy day without an umbrella and suddenly experienced vendors offering them at a ridiculously elevated price? It’s all about supply and demand. They’ve got it, and they know you’re willing to pay more for it.

In America’s housing market, it looks like it’s raining. There isn’t enough housing inventory, and there are many looking to buy. We’re presented with an unprecedented market primarily driven by the pandemic, in which prices have spiked and brokers have to work harder than ever to secure a property for their clients.

A low inventory and high demand have caused people to compete for properties. Many buyers have found themselves making multiple offers, and the growing housing shortage has taken buyers to a level of exhaustion many haven’t seen in a long time. Brokers are submitting more offers than ever before and working with clients over more extended periods due to increased competition. Real estate agents and buyers are equally exhausted, having difficulty understanding just how competitive the market is.

Why is the United States going through such inventory insanity?

Picture this: It’s 8:00 a.m. and your cat is looking at you, trying to figure out why you’re still home. The government has asked you to stay in your one-bedroom apartment indefinitely, and your partner is helping you set up a decent enough background for your future in the shape of virtual meetings while your kid asks you to play.

In other words, an economy in which most are working from home coupled with a year-long quarantine has spurred many to relocate to bigger homes or new locations.

To add to that, low interest rates have allowed more people to afford their dream homes. If you’re in the upper 33% of income distribution in the U.S., chances are you are financially stable and have more disposable income than in any given year — and you probably also need more space.

Another critical factor is that Millennials are reaching their home-buying age. I found a great resource prepared by the Freddie Mac single-family department that dives deeper into why Millennials are arguably the most influential generation since Baby Boomers, in great part because they make up the largest share of the new-home-buying population. Millennials are ready to buy their first homes.

And it is not only homes designed for Millennials, with median prices, that are experiencing demand. A recent report from Corcoran reveals that Manhattan has seen a significant spike in the luxury market as well, with its biggest first quarter of signed contracts since 2007. Whoever said New York is dead was clearly not investing in real estate.

Foreign investors are another critical factor worth mentioning, especially in major cities such as New York. As we head out of the pandemic and foreign investors return, buyers who have been taking advantage of low-interest rates may stumble upon higher prices due to this quarter’s closings being recorded.

A Shortening Of Supply

The roots of the shortage in inventory dates back more than a decade. Zillow’s senior economist recently shared (registration required) that since 2007, developers have been radically under-building, especially when it comes to single-family homes. Most recently, labor shortages brought by the pandemic have halted the construction industry.

To add to that, more investors have been joining the market in the purchase of new homes. Looking for a quick appreciation, investors have been finding more safety in residential real estate than other alternatives such as U.S. Treasury bonds, stores, restaurants or the hospitality industry. Almost a quarter of all housing transactions are reportedly going to investors. With investors rushing into the market, everyday buyers find themselves outmatched.

Lastly, many potential sellers have been holding onto their properties. Some expect to get a higher price; others simply can’t sell their property because they live in it and can’t get out.

The Result

Even though the drop in mortgage rates is good news for those looking to take advantage of the very-low-rate environment, cash continues to be king. There is fierce competition, in part because there are new players such as Redfin or Zillow looking to compete in the purchase of available properties. Buyers today often have to write multiple bids to keep up with their competitors, some giving up entirely, feeling demoralized after facing numerous rejections.

Without an increase in supply, renters struggling to become homeowners will have an even tougher time purchasing their first home. At the end of March, there were 1.07 million housing units on the market — a shocking 28% decrease year over year. A lack of inventory is the biggest challenge affecting today’s market, leading many to turn instead to home building or securing a property outside dense cities, where they tend to find better opportunities.

Is there any good news? Yes. We are in a heightened state of the market, which will not stay like this forever. Many of the industry’s top leaders I’ve conversed with seem to agree that a correction will occur in 2022.

We are finding ourselves at the beginning of a new economic cycle, and there are bound to be many new exciting opportunities — so let’s keep our eyes open to find them.


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