“My kingdom for a house!” The biggest hurdle for the housing market in the middle of 2017 is low inventory. Housing starts, housing permits, new home construction and pending home sales have all slowed this summer.
“Ten years ago, the problem in the housing market was lack of buyers,” said National Association of Realtors (NAR) chief economist Lawrence Yun. “Today, the problem is lack of sellers. Inventory levels are near historic lows. Consequently, prices are running up too high. Over the past five years, prices have increased by 40 percent, while people’s incomes have only grown by 10 percent. That’s unsustainable, choking off affordability.”
A couple of factors have created the situation. The most important one is that early in the housing market recovery, private equity firms saw a huge opportunity in real estate. They raised money, then bought up as many distressed properties as they could, fixed them up and rented them out.
You might think, given the increase in prices, that these institutional investors would simply flip the properties and be happy with the profits. However, the rents that they were collecting amounted to a better stream of income than they could find in the bond market, so they’ve held on. And because the majority of the properties were at the lower end, there is now a shortage of homes for first-time buyers in many markets.
Meanwhile, many Baby Boomers are choosing to renovate their homes and to stay put; and some homeowners may be reluctant to give up their ultra-low mortgage rates.
Still, according to NAR, interest in buying a home is the highest it has been since the Great Recession, because households feel more confident about their financial situation. Job growth is strong in most of the country; the stock market has seen record gains in recent months; and mortgage rates remain at historically low levels.
If you are a buyer in this seller’s market, there are steps that may improve your odds of finding that “Home Sweet Home.”
1. Run the numbers: It’s important to understand how much home you can afford to buy and whether home ownership might preclude you from addressing other important financial issues in your life, like paying off debt. A CERTIFIED FINANCIAL PLANNER™ professional can help you understand how your housing choices can support your overall financial plan.
2. Start the mortgage process/correct credit report mistakes: If you have not done so in a while, go to AnnualCreditReport.com and request your free copy. It’s important to correct any errors on the report before you start the mortgage process.
3. Conduct research: Even if you are working with a realtor, check out new listings and spread the word throughout your network. You never know who might be about to list a home.
4. Keep your emotions in check: Even with limited supply, there are a lot of houses out there. Be careful not to blow through your budget or put yourself in a position where you own two homes.
To buy the house of your dreams in this environment, you may need to save more, look longer and be alert to unexpected opportunities. A CFP® professional can help you prepare.