What is low inventory?
Over the past several years, real estate and the housing market have had their share of ups and downs. Now, there’s talk that the housing market is in recovery, which should be good news for everyone, buyers and sellers included. But now, as spring approaches, and the housing market prepares for the biggest season for real estate, is the housing market really in recovery?
A phrase has been thrown around a lot. This phrase is low inventory. But what does this mean? It’s simple, really. In the housing market, inventory consists of the houses that are up for sale. The more houses on the market, the greater the inventory. The fewer houses on the market, the lower the inventory. Thus, low inventory.
Low inventory is the heart of supply and demand. If supply is low, and demand is high, this creates higher prices and a more competitive market. Low inventory usually favors the sellers, as they have what little inventory is in high demand. This makes the housing market a little volatile for buyers, as they will have to pay more, and the potential for bidding wars is much higher.
Bidding wars only benefit the seller, as it can cause the buyer to overpay on the home. And this is a part of what can cause low inventory in the first place. According to a study done by Redfin Research Center, there are several factors that can prevent a potential seller from listing their home.
Those factors create a low inventory, or scarcity, of houses available for sale. In the study, Redfin determines that a little more than half of all potential homes are not put up for sale. Some of the reasons include homes that were purchased relatively recently, and the homeowners are underwater, or have low equity. If the homeowner sold their home, they would still owe on the mortgage, or walk away with practically nothing. In other words, there is no financial reason to sell the house.
What you need to know
Another reason is time. Redfin found that most homeowners don’t consider selling their house if they’ve lived there for less than seven years. On average, houses are only listed for sale after seven years. Due to the recent influx of people buying homes or refinancing, not as many homeowners are ready to list their houses, which contributes to low inventory.
In the past few years, interest rates on mortgages were incredibly low. The lowest they’ve been in quite some time. People that bought houses then are unwilling to sell their homes now because interest rates have increased substantially. For instance, the Redfin study suggests that if these homeowners were to buy the same home, their mortgage payments would be significantly higher. Around 29 percent higher. That’s a solid reason not to sell, and another factor that contributes to low inventory.
Low inventory creates more competition if the demand is still high. That means there are more people wanting to buy a house than there are people wanting to sell. Of course, this can cause an inflation of prices, as house prices increase because of demand. Even if prices don’t increase on their own, it can happen naturally through bidding wars.
Because of low inventory, more buyers become interested in the same house, which leads to multiple bids. In order to buy the house, the buyers have to offer a better price than the other buyer, which can naturally lead to a higher selling price; even a price greater than the list price.
However, in order to win the bid, it doesn’t always mean you need to spend more money. Think outside of the box, and with a good real estate agent on your side, you can beat the bidding war before it even happens. Sometimes, all a good offer needs is giving the seller another day to move out.
With low inventories it’s important to tackle buying a house with different tactics. You don’t want to overpay for a house, and end up underwater in a mortgage yourself. Get creative with your offer, and work with your agent. Low inventory doesn’t have to mean you don’t buy the house you want. You just might have to tackle the problem in a slightly different way than normal, and think about how you can make your offer irresistible to the seller.