Tuesday, 12 September 2017 00:00

Housing Inventory Shortages

Housing inventory shortages have been a hot issue over the last 18 months. Where is this crisis at its worst? What opportunities does it present for investors?

Realtors have been continually stressed about the shortage of housing inventory over the last couple of years. This may bring both advantages and disadvantages for some real estate investors. So, just how tight is the market? What is causing the drought in supply? Where are the opportunities?

Supply & Demand: America’s Tightest Housing Markets

The days of America being a massive buffet of homes capable of filling the appetite of every individual and global fund have certainly changed a little in the last ten years, according to the media. In January 2017, economist Jonathan Smoke said two thirds of the US housing market is seeing less inventory, with tight credit and limited construction remaining factors in this change.

Realtor.com’s List of Cities with Worst Housing Shortages:

  1. Seattle, WA
  2. Eugene, OR
  3. Grand Rapids, MI
  4. Buffalo, NY
  5. Fort Wayne, IN
  6. Sacramento, CA
  7. Detroit, MI
  8. Portland, OR
  9. Santa Rosa, CA
  10. Omaha, NE

According to the National Association of Realtors, the average days on market for homes as of July 2017 was 64 days. Well priced properties in the above markets can sell far faster than that, and often in multiple bidding scenarios, with winners paying over asking price.

The Pros & Cons of Our Housing Inventory Shortage

There are obvious issues with a tight housing market, but there may be more upside than many are paying attention to.

The Cons:

  • High competition for listed homes
  • Unrealistic sellers pricing too high
  • Lack of affordability for regular home buyers and renters
  • High asset prices, and cost to rent ratios
  • Decline in price and sales volume growth

The Pros:

  • Faster to sell real estate
  • Able home buyers are willing to pay premium prices
  • Ability for landlords to charge higher rents
  • Higher asset values are encouraging lenders to be more aggressive in helping investors refinance

Factors Investors Need to Know

A big part of the current situation is due to the investment activity over the past few years. Economists from NAR and the NAHB weighed in via Marketplace, saying few owners are now selling, especially with much of the nation’s housing stock now in the hands of long term hold real estate investors. Plus, builders have been focused on building higher end properties where they can get far better returns on their land versus constructing much needed starter homes.

However, others believe there is still certainly some market manipulation in place. Once banks and lenders got lumbered with all that inventory in 2008, they figured out they needed to tighten their grip on inventory in order to keep up their own asset values, and avoid going bankrupt. Behind the scenes we still have millions of vacant homes, and around two million borrowers in some stage of foreclosure, as of mid-2017. Yet, maybe 1% of these properties might actually be publicly listed for sale on the MLS. So, the opportunity is currently far larger than it appears. There is substantial new construction in some cities, which others have pointed to as a sign that over supply is coming. Though NAR has said that construction is far behind supply.

Summary

America is currently experiencing a tough housing shortage. At least in terms of publicly available home listings, in some hot cities. While new construction is hot, it may not be enough to soften the market yet. Those who are serious about finding new acquisitions will find big pools of off market shadow inventory waiting to be tapped. It’s all about knowing where to look, and making the right connections. When they do, lenders are eagerly standing by to provide the rental property financing they need.

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