Two reasons housing inventory is so low right now (Podcast)

Why aren’t there more homes for sale?

It’s no big secret that housing inventory is low. In fact, it’s one of the major reasons home prices are rising. With demand high and few homes for sale, competition is stiff — driving up prices and making it harder and harder for Americans to find homes.

Mortgage advisor Arjun Dhingra discussed the topic on the latest episode of The Mortgage Reports Podcast; specifically, what’s behind this extreme shortage.

Are you on the hunt for a home? Wondering when the market will normalize? Here’s what Dhingra says you should keep in mind.

Listen to Arjun on The Mortgage Reports Podcast!

Two reasons for low housing supply

According to Dhingra, there are “two major reasons we have such an inventory shortage in the United States.”

The first has to do with the housing crash over a decade ago. And the second? That would be existing homeowners. Let’s go into both in more depth.

1. Homebuilders and the housing crash

Leading up to the housing crash, Dhingra says, “homebuilders had really overextended themselves.”

“They were building at such a fast pace that it actually was outpacing demand,” Dhingra says. “So that means you had more homes available on the market than there were buyers.”

Banks began loosening mortgage standards in order to allow more buyers to scoop these homes up, Dhingra says, but that only made things worse. Eventually, when the bubble burst and home prices started falling, “builders were left holding the bag.”

Many closed up shop, and those that didn’t were stuck with a glut of foreclosed inventory that they had to unload at “a severe and heavy discount,” according to Dhingra.

“It cut into their profitability, and it made builders really gun-shy going forward,” Dhingra says. “Since then, they’ve been proceeding with a lot more trepidation and caution because they didn’t want to end up where they ended up 10 years ago.”

Though builders have started to pick up the pace in recent years, they now have an added problem to deal with: Inflation.

Thanks to inflation, the cost to build a home has skyrocketed. Building supplies are more expensive, as is labor. As Dhingra puts it, “The cost to build a home has gone through the roof, whether it’s materials, permitting, the legal side, or insurance costs, and there’s also the labor side. All of this together is eating into the profit margins of these builders, and they can only raise the home price to try and cover that by so much.”

Related: How will inflation affect the housing market in 2022? (Podcast)

2. Existing homeowners

The second factor driving low inventory has to do with existing homeowners — those who hold the bulk of the country’s housing assets.

“If we look at the middle- and high-income earners in the United States, which happen to be the folks who hold the most real estate assets, we will see that they were actually the least affected by the pandemic and the economic cycle of the last few years,” Dhingra says. “Most of these people work in industries or are self-employed in spaces that actually thrived and did well during the pandemic.”

Rising home prices and mortgage rates are also forcing existing homeowners to stay put.

Instead, the pandemic largely impacted those in the hospitality and service industries — many of whom are renters and don’t own property, Dhingra says.

“So we just never saw this glut of inventory coming on the market because we were having a small recession and a global pandemic and people felt the need to sell their homes,” he says. “Those people actually saw the value of their real estate asset increase, so naturally, they’re thinking, ‘My house is doing great. If anything, what I might do is add on to it or make it a little bit better.’”

On top of this, rising home prices and mortgage rates are also forcing existing homeowners to stay put.

“If you do sell your home for an amazing price, where do you go?” Dhingra asks. “The next home you buy is going to be smaller and even more expensive.”

Will housing supply improve in 2022?

All in all, Dhingra says, we’re at a standstill. More construction can help, but builders can’t find the labor or keep up with rising supply prices. And on the existing home side, there’s just no incentive for homeowners to list these days — at least without paying more on the backend.

“Unless there’s a major shock to the middle- and high-income earners in the United States, I don’t see this part of the market shaking up,” Dhingra says.

That said, inflation and rising mortgage rates may lead to a slight cool-off in the housing market. Some experts predict we’ll see home prices rise more slowly and competition ease up as higher rates push some buyers out of the market.

That means despite ongoing low inventory, prospects might look a little better for home buyers in the coming months. So if you’re in the market, it may be well worth staying the course until you find the home you want.