The Mortgage Reports Contributor

Who Wins and Who Loses in a Housing Shortage Crisis?

“We must continue to beat the drum for more inventory”

Millions of Americans are primed to buy their first home in the coming year. But they might have slim pickings.

That’s because the U.S. is in the middle of a massive housing shortage.

“Home prices are rising too rapidly because of the housing shortage,” says Lawrence Yun, chief economist with the National Association of Realtors.

“This lack of inventory is preventing home sales growth potential. We must continue to beat the drum for more inventory.”

But there are other shortages to worry about, too.

Lack of space and too few builders means growth will likely be slow.

So if you see a house you like in the market today, don’t sleep on it. See if you can afford financing and make the move before another eager buyer snaps the place up.

The case of the missing real estate

A lot of people want to buy homes. TransUnion expects “at least” 8.3 million first-time homebuyers — and maybe as many as 9.2 million — to enter the mortgage market between 2020 and 2022.

In either case, that’s up substantially from the 7.6 million first-time homebuyers added between 2016 and 2018.

But it seems like those would-be home buyers might have slim pickings.

In September, according to NAR, the country had 1.83 million homes for sale, a real estate inventory equal to sales for 4.1 months.

The U.S. is about 330,000 homes short of a healthy real estate market, compared to recent history.

That’s down from the recent norm.

NAR tells us that between August 2010 through August 2019, some 2.16 million homes were typically on the market at any one time (a 5.3-month supply).

That means we’re missing about 330,000 homes for sale right now. So what happens to those 330,000 potential home buyers?

Does inventory impact mortgages?

Inventory doesn’t directly affect mortgages. But it does affect the real estate marketplace in several ways.

If you’re a buyer, higher prices can create affordability issues. As loan amounts increase, it becomes harder and harder to qualify for financing on a budget.

But for current homeowners, an inventory shortage that leads to higher real estate prices can be a good thing. Why? Because higher prices mean you have more equity in your home.

If you want a cash-out refinancesecond mortgage, or home equity line of credit (HELOC) the application process will be easier with more equity — plus, you’ll be able to get a bigger loan.

Explore your home financing options today (Nov 21st, 2019)

Can we build our way out of the housing shortage?

The solution to a real estate shortage seems obvious: Build more homes.

But you might not want to pin your home buying hopes on a big swell of new real estate construction.

First, because median home prices for new homes are higher than for existing properties.

In September 2019, it cost over $25,000 more to buy a newly constructed house. That means more down, more to borrow, and bigger monthly payments. For many potential homebuyers, it’s a financial step too far.

Second, more construction requires more tradespeople.

According to the National Association of Home Builders, the industry has 338,000 job openings in September. It needs more masons, carpenters, plumbers, electricians, etc. Without these people, construction can’t move forward on a huge scale.

The last time the country built more than one-million single-family homes was in 2007. This year, fewer than 900,000 single-family housing starts are likely.

Real estate inventory and home prices go hand in hand

It’s important to remember that inventory is a local issue.

In the second quarter of 2019, home prices rose in 162 out of 178 metro areas, according to NAR. That means prices rose across 91% major of U.S. cities.

But home price gains weren’t spread equally. Some areas showed much bigger leaps in sales prices than others.

Metro areas with the highest home price increases in Q2 2019:

Metro area Median home price, Q2 2019 Year-over-year price change
Boise City-Nampa, ID $295,600 +12.5%
Beaumont-Port Arthiur, TX $171,100 +11.4%
Atlantic City-Hammonton, NJ $213,200 +10.4%
Wichita, KS $163,700 +9.9%
South Bend-Mishawaka, IN-MI $146,000 +9.9%

What do all these metro areas have in common? Maybe that you haven’t heard of them before — or at least, never thought of buying a home there.

In many areas where prices are skyrocketing, the current median home price is still below $300,000.

But the most important commonality is that in all the areas where prices are skyrocketing, the current median home price is still below $300,000.

And many of these areas are now experiencing the worst inventory shortages.

Lock in affordable home financing. Start here (Nov 21st, 2019)

Inventory shortages are worst in affordable markets

“The largest inventory declines have been in price points under $200,000,” explains Realtor Magazine. “That segment posted a 15.2% drop [in inventory] year over year in October.”

Realtor Magazine also reports, “The mid-tier inventory — homes priced between $200,000 and $750,000 — fell by 4.3% annually, while the nation’s priciest homes — those selling for more than $750,000 — rose 1.3% year over year.”

“The largest inventory declines have been in price points under $200,00” –Realtor Magazine

In large part, that’s because first-time home buyers have been flocking to those lower-priced markets.

The influx of buyers has quickly overpowered the number of homes on the market. And as a result, prices are on the rise.

By contrast, says NAR, “the most expensive metros in California, Hawaii, and Colorado continued to post year-over-year price declines.”

Price decreases in some of the most popular and expensive metros:

Metro area Median home price, Q2 2019 Year-over-year price change
San-Jose-Sta. Clara- Sunnyvale, CA $1.33M -5.3%
San Francisco-Oakland-Hayward, CA $1.05M -1.9%
Urban Honolulu, HI $785,500 -1.2%
Boulder, CO $625,300 -0.9%
Naples-Immokalee-Marco Island, FL $454,000 -2.4%

So, is there an inventory surplus in San Francisco, San Jose, Honolulu, or Naples that’s driving home prices lower? Hardly.

The problem is that these areas are largely unaffordable to begin with. No inventory shortage is needed to push buyers out of the market. They’re staying away already.

In reality, inventory shortages are hitting harder in more affordable markets — the ones buyers have been favoring thanks to historically low sales prices.

Re-defining real estate

There are really two forms of real estate inventory shortages. One shortage concerns homes available for sale and a second shortage involves the need for more residential units.

Maybe the way to address such shortages is to re-think how we define housing.

Some have started to question: Do we really need so many single-family homes on large lots?

Some states are addressing the lack of available housing — and lack of available space — by allowing more homes to be built on existing lots.

New Hampshire now has a state-wide law allowing the construction of accessory housing – so-called “tiny homes,” “casitas,” or “granny flats” of up to 750 sq. ft. Where there used to be one housing unit there can now be two.

In Oregon, the state has done away with single-family zoning in communities with at least 25,000 people. Land can now be used for multiple units.

Meanwhile, in California, the state is also allowing more units per lots.

“Owners of single-family lots,” explains the Los Angeles Times, “aren’t able to build multiple-unit apartment complexes on their properties. But the new laws allow homeowners to build an additional unit detached from a single-family home and turn part of an existing structure into a third living space.”

Says the Times, “state policies have eased the way for property owners to build such housing by stripping away… requirements that previously blocked or slowed construction, and by curtailing other rules that forced homeowners to pay fees, install parking spots or live on the property prior to building the units.”

The new movement to multiple units on lots once reserved for single-family homes is creating new housing units but not traditional “homes” for sale.

It’s also creating new wealth as owners cash in from overnight rental demand and long-term tenancies made possible by the additional units.

Your next steps

Housing shortages affect everyone differently.

If you currently own a home that’s rising in value, you might take advantage of your newfound equity through a cash-out refinance or home equity line of credit.

If you’re in the market for a new home, shortages can increase buyer competition.

The best thing you can do is get pre-approved for financing, so you know your budget and can move on a house you love at a moment’s notice.