How Inventory Limitations Affect the Housing Market

The housing market is a dynamic entity influenced by various factors of the economy. In recent years, decreasing availability of real estate inventory has become an issue with the most influence on current high home prices, bidding wars, and increasing frustration for first-time homebuyers.

Supply affecting demand is nothing new, but taking a closer look at real estate market trends can help you better understand the current affordability of homes so you can be prepared for the challenges you may face as a first-time buyer. In this article, we will discuss how inventory limitations affect the housing market, along with strategies you can use to help you secure a home.

What affects housing inventory?

There are three categories that homes on the market will typically fall under: new construction homes sold by builders, existing homes listed by the current homeowners, and houses that have been foreclosed. In a low housing inventory market, the demand for homes outweighs the number of available properties for sale (also known as a hot market or seller’s market).

Several factors can have an impact on the amount of housing inventory available to buyers, including:

• Shifts in the economy, including rising interest rates and overall employment
• Government policies meant to create incentives promoting homeownership
• Changing demographic trends, like urban migration to suburban housing preferences
• Natural disasters and economic downturns

Fluctuations in the availability of property are a normal part of the housing market. However, the shortage that has been affecting new homebuyers in recent years can be linked to two major elements:

1. A slowdown of new construction builds

In the past, new construction of single-family and residential homes was a tried-and-true way of increasing supply to keep up with demand. However, rising material and labor costs in recent years have slowed down the production of new builds. Simply put, builders have not been able to construct new homes fast enough to keep up with demand from buyers.

2. High mortgage rates and home prices

When interest rates were at a record low in 2020 and 2021, many homebuyers jumped on the opportunity to purchase a house. However, since then mortgage rates (along with home prices) have increased and many homeowners are reluctant to sell because it would mean buying a new home at a higher mortgage rate.

Navigating a low housing inventory market

When it comes to finding a home in a hot housing market, the odds are not in the favor of buyers, but that does not mean you have to wait or give up on finding a home. You just have to be strategic.

Here are expert tips that can help you navigate and succeed despite low housing inventory:

• Get pre-approved for a mortgage by a trusted lender
• Work with an experienced real estate agent
• Take time to improve your credit score
• Research areas you are interested in and the housing market trends
• Be prepared to act quickly when you find a home you like
• Keep your expectations realistic
• Know your mortgage budget
• Submit strong offers
• Be flexible

Affordable housing and loan options for first-time buyers

As a first-time homebuyer, it can be especially intimidating for entering a market that is not leaning in their favor. Whether you have concerns regarding the affordability of a mortgage, or the availability of housing options, it is normal to feel hesitant. The good news is, there are flexible options for you to consider that can help ease your stress and get you that much closer to homeownership.

• Lock-in your mortgage rate: Mortgage lenders allow you to get a rate lock on your loan for a pre-determined amount of time. This means you can secure a great rate when they drop, and search for a home without concerns that it will suddenly change. It is important to note, that once your rate is locked in your lender will have a set timeframe for you to find a home and be approved for the mortgage loan. In some cases, you may have the option to extend your rate-lock if you are unable to close on a home within the original lock period.

• Consider alternative housing options: These home types are growing in popularity and offer an alternative option to conventional homes, allowing homebuyers more flexibility and a unique way to reduce household costs for those who desire financially sustainable living.

• Use a construction loan to build your home: Finding a home that meets all of your needs and expectations can be difficult. That is why some homebuyers choose instead to build their dream home from the ground up with a construction loan. This type of loan may be used to finance a completely custom or new house—built based on your specifications—or to pay for major renovations on an existing home.

• Research loans made for first-time buyers and mortgage assistance programs: Buying a home is a life-altering transaction and it can feel out of reach for first-time buyers or those working with a low- to moderate-income. However, there are types of loans and programs that have been created for the purpose of making homebuying more affordable! If affordability is at the top of your list, here are some mortgage options you can research and discuss with your chosen lender to see if they offer these options:

• • FHA mortgage loans: government-backed mortgage option with more flexible requirements, including a down payment as little as 3.5%

  • VA loans: another government-backed mortgage option for veterans, military members, or their spouses that often offer better terms and interest rates

  • USDA mortgages: a loan program run by the U.S. Department of Agriculture (USDA), also known as the Single-Family Housing Guaranteed Loan Program

  • HomeReady^Ⓡ loans: a type of conventional mortgage that allows borrowers to finance up to 97% of a home purchase, so you only need as little as a 3% down payment

Everyone’s homebuying journey looks different, depending on your personal circumstances and the overall temperature of the current market. However, taking steps like improving your credit score, getting pre-approved, and researching your mortgage options will go a long way in helping you stand out from a crowd of other buyers.

Be patient, stay in the know, and good luck!