Low housing inventory has plagued U.S. real estate markets since the beginning of 2020, driving up home prices and making it difficult for first-time buyers to find a home. Low housing inventory affects homebuyers, homeowners and real estate agents and can have rippling effects on the economy.
Low housing inventory, or a housing shortage, is a supply and demand problem. It means there is not enough housing supply to meet the demand of those ready to buy. Read on to understand low housing inventory and its impact on your next home search.
What Does Low Housing Inventory Mean in Real Estate?
Low housing inventory means fewer homes are on the market than interested buyers. This can happen for various reasons, but the overall effect is greater demand than housing supply. In many cases, this means fewer homes are constructed than the pace of demand by new homeowners.
In more technical terms, a balanced real estate market will have five to seven months of real estate inventory and an absorption rate between 5% and 8%. The absorption rate is calculated by dividing the number of homes sold in a month by the number on the market. This gives you an idea of how quickly homes sell. A high absorption rate indicates a low housing inventory or a seller's market. A low absorption rate indicates a buyers' market with greater supply than demand.
One of the greatest impacts on housing inventory was the pandemic, when workers were at home for months, driving up demand for homes, especially in rural areas, compared to supply. At the same time, with supply chain issues and a lack of labor, builders stopped building, further exacerbating shortages.
More recently, increased demand among investors and cash buyers has caused low housing inventory despite increased new construction. While high interest rates have reduced demand among general buyers, the supply and demand pendulum has not yet started to swing because of investors and cash buyers making purchases in droves.
What Causes a Low Housing Inventory?
Normal housing inventory means a reasonable balance between supply and demand. New home buyers and homes for sale are in an equilibrium, in which homes in good condition don't remain on the market for months, and first-time buyers can find a home to meet their needs in their budget.
Low housing inventory can be caused by a variety of reasons, including:
- Record low interest rates, leading to more first-time homebuyers
- Investors purchasing inventory, increasing demand
- Less new construction than demand
- Sellers not listing properties or an increase in for-sale-by-owner
How Does the Low Housing Inventory Impact Buyers and Sellers?
Low housing inventory impacts both buyers and sellers. For buyers, it can be more difficult to find a home. You may have to settle for one that doesn't meet all your criteria. With low housing inventory resulting from low interest rates over the past few years, new homeowners may be disappointed by available options.
In addition, you could spend months searching for a property or having offers rejected. Many times, would-be homeowners will be forced to bid above the home's asking price to try to stay ahead of the competition. You may face rejections or have to compromise on the size or features of the home.
In addition, finding a property in your budget that meets your expectations can be a challenge in many markets. Buyers with more limited resources may be left with little room for negotiation or repairs.
For sellers in a low-inventory housing market, selling their property is easy. You may be able to sell your home for more than it's worth. But you'll face the same struggles as other buyers if you want to purchase a new home in that low inventory market.
How Can Potential Buyers Navigate Low Housing Inventory?
Potential buyers facing low housing inventory can work with real estate agents with local market expertise. You can explore alternative housing options, like a co-op, rentals or nonconventional options growing in popularity like tiny homes.
You can also consider expanding your search area. And most critically, you'll need to be prepared to act quickly when suitable properties become available. Have your mortgage preapproval ready and be prepared to offer a fast closing with an offer at or above the asking price. Having a compelling story and writing a letter to the property owners can help you secure the property.
How Long Is Low Housing Inventory Expected to Last?
How long low housing inventory is expected to last depends on various factors. While the pandemic still impacts the current housing market, this housing shortage usually takes four to six months to rebuild.
The current market has an interesting mix of historically high interest rates combined with exceptionally high home prices, pricing out many would-be first-time homebuyers who are more pessimistic than ever about being able to afford a home. Will the market turn? Historically, it always has. But whether that happens in four to six months or two years remains to be seen.
Should You Buy a Home Now?
Between limited options, the stiff competition of investors and all-cash buyers, and high interest rates, many younger people are starting to feel like homeownership is out of reach. But even with these factors, it could be the right time for you to buy a home. Consider the local market, carefully research target neighborhoods, work with a trusted real estate agent and carefully plan to prepare to purchase a property so you're ready to move quickly. You don't need the whole market to shift; you only need one house you can make a home.
And remember that while low housing inventory may be around for a while, it won't be around forever. Whether you buy now or wait, carefully balancing your total financial picture and housing costs with long-term savings can help you protect your financial interests and create the best opportunities for homeownership.
Ready to start looking? Find the best online mortgage lenders, or get our mortgage guide for first-time homebuyers here. Or find other ways to invest in real estate even when housing inventory is low.
Frequently Asked Questions
Does low housing inventory affect all types of housing equally?
While low housing inventory can affect all types of housing, low-income families are usually the most affected by housing shortages. With increased demand, they can be priced out of rentals or purchase options, while those with higher incomes may just be forced to downsize.
Can low housing inventory be resolved quickly?
While low housing inventory can be resolved in as little as four to six months, in some cases, it can take even longer.
Are there any government initiatives to address low housing inventory for home buyers?
Yes, the Department of Housing and Urban Development (HUD) has various initiatives to address the low housing inventory for home buyers. One program is the Self-Help Homeownership Opportunity Program (SHOP), which provides grants to nonprofits to help develop affordable housing for low-income buyers.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.