Why is the Housing Inventory So Low?

By: ROS Team

One common topic in the real estate market right now is housing inventory. People are asking, “Is it a good time to buy a house given the low housing inventory?” Homebuyers are also often curious about inventory homes for sale.

Well, if you are looking to buy a home in the next few months, get ready for tough competition and higher prices; since the number of inventory homes for sale is low, the demand for these homes has skyrocketed. An unprecedented number of low inventory real estate means a boost in the number of offers sellers will receive from multiple buyers. The primary principle of supply and demand is at play in the real estate market. More buyers and too few available properties are pushing home prices higher.

Before we discuss why the housing inventory is so low, let’s first define what is an inventory home.

What is an Inventory Home?

An inventory home, otherwise known as a home for sale or active listing, is simply the number of properties available in the market for sale. Whenever a seller lists a property for sale, it is counted towards the area’s total housing inventory. A buyer can visit a property or attend an open house event and provide a list of the inventory homes for sale. This listing would not include houses that are already on a contingency or are temporarily not available for showing.

How to Calculate Housing Inventory

Housing inventory is calculated by simply counting the properties currently listed on the real estate market as of the last day of the month. In a low inventory real estate market, buyers may become discouraged when they find limited options, most of which don’t even meet their needs or are unavailable in their preferred neighborhoods. But if there are more homes available in inventory, buyers are more likely to want to make a move.

How Low is the Inventory Level is Right Now?

2021 was the lowest housing inventory year on record; housing inventory declined almost 40%. What made the situation worse was the higher number of buyers in the market. The combination of low inventory real estate and high demand lead to the increase in house prices. Statistics show a nearly 13% increase in home prices in 2021.

If we look at 2022 data so far, there is about a one-month supply of inventory homes on the market right now. That means that if no new homes become available, there won’t be any homes available to buy after a month. Normally, there’s approximately a six-month supply of inventory homes for sale at any time.

Low inventory will inevitably translate into more competition for available properties. As a buyer, you will have to stay prepared and be ready to move quickly once you find a home that meets your criteria since there’s a high probability that someone else is interested in the home as well.

Why is the Housing Inventory so Low?

To understand why housing inventory is so low, we have to look at how the 2023 market behaved. The primary reason there was low housing inventory in 2023 was because of seller uncertainty. It was not really influenced by whether homeowners could sell their homes and more influenced by what happened once the house sold.

Sellers were getting the highest prices and are able to sell quickly, but they were afraid that they might not find another affordable home. So sellers have decided to hold on to their houses for a bit longer, which ultimately led to the low inventory real estate crisis.

Housing Inventory So Low

Another reason behind low housing inventory is the increased motivation of buyers, as record low mortgage rates pushed more buyers to purchase the property.

Of course, a lot of it also has to do with COVID-19 and its effect on life overall at the height of the pandemic. As people continue losing jobs, more foreclosures are expected by the end of 2022. Additionally, people have left urban centers due to social distancing requirements and remote working, so city life has become less of a draw for buyers.

The real estate market remains in balance if the number of sellers matches the number of buyers. Given the uniqueness of the past year, it will take some time before the market is fully restored.

So, be ready to expect an ongoing trend of:

High house demand;
Low housing inventory;
Low mortgage rates; and
Higher home prices.

It is evident that the current real estate market is stacked against buyers. Low interest rates allow the average buyer to afford a larger loan. It has become a contributing factor in higher home prices, and the limited supply is increasing competition. So, to counter the situation, buyers should brace themselves for tougher competition.

So, What is the Solution to This Problem?

If you think simply adding more listings is the solution, you are not fully understanding the problem. Adding existing homes for sale doesn’t create inventory. A more definite answer to the problem would be adding more residential developments. Population growth is likely to outnumber the existing housing inventory sooner rather than later. More homes are needed to accommodate the housing demand.

Make Moves on Available Homes

Given the highly competitive nature of the market, here are some excellent strategies to stay prepared:

Learn about the neighborhood in which you plan to buy property;
Get the property appraised beforehand so you’ll know how much the property is worth;
Be ready to pay more than the asking price;
Offer some concessions if you can; and
Get pre-qualified or pre-approved for a home loan before you actively begin your search.

Final Thoughts

Expect that home prices are likely to keep increasing as low inventory homes for sale continue to prevail. But that does not mean you should sit idle during this trend. Instead, prepare all of your required documents and get pre-qualified. Start planning now so you can maximize your chances of securing an offer in this competitive market when the opportunity comes.