Low Inventory Becomes Our New Normal

It’s a seller’s market, and potential homebuyers need to up their game

Back Commentary Jul 6, 2017 By Ryan Lundquist

One of the most pressing topics right now in housing is low inventory. Frankly, there just aren’t enough homes for sale in the Sacramento region, and it’s a problem. If you’ve bought or tried to buy recently, you certainly know this.

Since 2014, we’ve seen the supply of homes for sale in the region cut in half. I won’t bore you too much with numbers, but right now we have about a 45-day supply of homes for sale compared to about a 3-month supply of homes just three years ago. What does that even mean? There are only enough homes listed right now to last for 1.5 months. There are easily three months worth of buyers trying to compete for this small amount though. This is exactly why the market feels so competitive.

What’s causing this shortage? Over the past decade, we’ve had population growth in the region, and new construction has not kept pace. It’s been nice to see more infill projects, but the truth is homebuilding has been weak since the real estate bubble burst nearly 10 years ago. We are nowhere near the level of construction from 2003 to 2005. On a related note, many builders are struggling to find skilled workers because so many laborers left our market when construction came to a standstill.

Additionally, investors went on a spending spree after the bubble burst. Thousands upon thousands of homes were purchased and made into rentals — instead of hitting the market for sale. For instance, the investment fund Blackstone (DBA Invitation Homes) bought the bulk of their 2,892 homes in Northern California during 2012 and 2013. With so many locals lacking the funds to move or unable to qualify for a mortgage because of a previous foreclosure or short sale, investors picked up the slack.

Let’s be real: We’ve loved low-interest rates over the past five years, and it’s been great when buying or refinancing. Yet, we’re starting to see the unintended consequences of historically-low rates. Many owners are sitting on a 3.3 percent interest rate from five years ago, and they just aren’t going to move out and trade up for a higher mortgage unless absolutely necessary. And potential sellers aren’t being pulled out of the area by wage growth or job opportunities elsewhere to make a move, so they’re staying put.

We frankly need more homes and apartments built, but that’s a marathon approach. For now, having low inventory has become our new normal. This is welcome news for sellers, but it can be discouraging for buyers.

This all sounds negative, but there’s a positive: Low housing inventory means sales volume has been increasing in the region. In simple terms, there are less available listings because more buyers are on the hunt. Also, in years past, a flood of foreclosure listings contributed to greater inventory, and we just don’t have that type of market any longer. In the thick of the economic recession, we saw some dark days in real estate as over 70 percent of all sales in Sacramento County were bank-owned — it’s now only 3 percent.

We frankly need more homes and apartments built, but that’s a marathon approach. For now, having low inventory has become our new normal. This is welcome news for sellers, but it can be discouraging for buyers — they end up feeling hopeless. There are things buyers can do though to better position themselves to get an offer accepted:

Prepare emotionally: Sorry to be a downer, but you probably aren’t going to get into contract on the first home you offer on. Remember, real estate is a bit like dating. You often don’t marry the first person you go out with. So take heart and expect you’ll submit many offers until something sticks.

Shop below your price range: If you are qualified up to $350,000 and money is tight, you might want to consider homes priced $320,000 to $350,000 instead of only looking at houses priced at $349,000. This allows you some space in case of a bidding war.

Remember, it’s not just cash winning contracts: There’s this idea out there that cash investors are gutting the market and leaving everyone else on the sidelines, but it’s simply not true — cash sales in the region only make up about 15 percent of sales each month. In contrast, FHA loans require very little money down and yet are consistently making up 25 percent of all sales in Sacramento County.

Find a way to make your offer stand out: We’re in a market where a house will get multiple offers, so buyers need to make their offers especially desirable to sellers. The offer probably needs to be at list price or above (assuming the list price is reasonable of course). Don’t ask for every little thing to be repaired, because sellers will get some offers without those requests. Try to make an emotional connection with the seller by writing a letter or doing something out of the ordinary. For example, while touring a home, my wife and I heard the seller was going to send her son to a private school at $1,400 per month. So in our full-priced offer we said we’d give the seller an extra $1,400 at the close of escrow to help pay for her son’s school. That made an impression and we got the house.

For now, we can expect sellers to continue to have more power than buyers, for a culture of multiple offers to be commonplace, and upward value pressure to persist in some price ranges and neighborhoods (particularly at the lower end of the market). The reality is nobody has a crystal ball to tell us exactly what values will do in the future, but in terms of inventory, there isn’t any indication it’s going to change for awhile. 

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