From low interest rates to the ongoing pandemic, a number of factors have come together to create the current inventory crisis.

No matter the source, the message is the same: We are experiencing a record-breaking lack of homes for sale. Since the trends being reported have been national in scope, I dove into our local county real estate database and went back 15 years. I discovered that we mirror the national data; inventory is at its lowest point since statistics began being reported.

While everyone understands we are facing an inventory crisis, there is confusion out there as to why. Malcom Gladwell, in his book Tipping Point: How Little Things Can Make a Big Difference, explains the concept as “that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire.”

I believe we have hit a tipping point in real estate as a number of issues have all come together to produce, for lack of a better analogy, a tipping point or a perfect storm.

Here are the top reasons we have tipped toward a historic shortage and are now facing an unparalleled dearth of homes for sale.

1. Continued low interest rates

As long as financing continues at bargain-basement rates, we will continue to experience demand that exceeds availability.

Not only have low interest rates allowed a larger number of buyers to enter the market, they have provided well-qualified purchasers with the ammunition needed to outbid the competition.

In fact, as stated in a May 2021 post on the dark side of low interest rates, it is my belief that low rates are doing significant damage to our economy (one of the leading indicators in surging inflation numbers is the cost of housing) and our society as a whole.

With stiff competition for a limited number of properties, home prices have skyrocketed. While it might seem logical that record high property values would trigger a flood of owners putting their homes on the market to cash in, the opposite is true (see additional reasons below). The result is that many sellers who may have considered moving have looked at the ridiculously low rates and decided to sit tight and refinance instead.

This has been made easier by the dramatic increases in equity most homeowners have experienced due to the escalations in home values. Once those refinances have been completed, sellers, looking at the long haul and potential of higher rates in the future, are effectively locking themselves in their homes and settling down for the long haul.

Additionally, some have decided that it makes more sense, given the overall uncertainty of these times, to refi, pull out funds and upgrade their current homes. Once the improvements have been made, these owners are not likely to sell anytime soon.

Others, realizing they are sitting on a gold mine, have been capitalizing on low refi rates to obtain down payments to purchase investment properties, thereby adding themselves to the buyer pool and further exacerbating the problem.

2. The COVID factor

Even though we are now almost two years into the pandemic, many workers are still commuting to their dining room tables instead of hitting the roads to go to work.

In our region, many families, faced with both partners working from home, have decided that their home is too small to handle the changes in functionality foisted on them by the pandemic.

With no apparent end to COVID and its increasing number of variants, many currently confined to apartments or condos are out in droves looking for larger spaces with more rooms they can use as home offices, exercise spaces and more. Currently confined to facilities with common areas they cannot effectively use, they are also looking for homes with yards.

3. Millennials

As reported by Zach Wichter at Bankrate.com in November, “Millennials are the fastest-growing segment of homebuyers, accounting for 37 percent of the overall U.S. housing market. Millennials make up an even bigger share of first-time homebuyers.

In all, 82 percent of younger millennial buyers (ages 22-30) and 48 percent of older millennial buyers (31-40) purchased their first homes between July 2019 and July 2020. First-time buyers represented 31 percent of all purchasers in the National Association of Realtor’s most recent annual survey, though that number has since dropped off.”

Wichter sources his data from NAR’s 2021 Home Buyers And Sellers Generational Trends Report.

Bottom line: At a time when boomers are selling their homes in record low numbers, millennials are entering the market at a rate higher than the declining inventory can sustain.

4. Higher property taxes

As little as five years ago, we could count on one hand the number of clients in any given year that faced a tax hit when selling their homes.

As values have skyrocketed, however, especially in overheated urban areas, almost everyone looking to sell is facing the prospect of paying large sums to Uncle Sam for the privilege of selling their homes at the new higher values.

While some are willing to pay the taxes to be able to relocate, others are deciding they will sit tight instead, thus limiting inventory that otherwise would have been available.

Another group in this category who might have been willing to sell in order to relocate are instead refinancing, using their equity to purchase a second home in another part of the country, and then keeping their existing home as a rental.

The current low interest rates make this a very attractive option, keeping payments low, making positive cashflow more likely. In this scenario, not only will the existing house not go on the market any time soon, but the owners join the buyer pool, further compounding the inventory crisis.

5. Aging in place

Natalie McGill, in The Nation’s Health (October 2013) stated, “The U.S. baby boom population is getting older. By 2030, residents born between 1946 and 1964 will make up 20 percent of the population, with 72.1 million Americans ages 65 and older.

As this population grows, so do concerns that the U.S. health system will not be able to meet the health needs of seniors, particularly in regard to demands for long-term care. But instead of moving seniors to nursing homes or assisted living facilities, some communities are taking another approach to long-term care: aging in place. Under the practice, seniors are able to reach advanced ages while still residing at home, thanks in part to community resources and programs.”

A second factor to realize is the overall increased longevity of boomers. Although they may not be healthier than previous generations, advances in healthcare have been increasing longevity with the result of a highly mobile and active aging boomer population. So long as they can continue to live active lifestyles, they are less likely to sell and more prone to age in place.

A third factor is financial: When facing the prospects of a significant tax hit when selling or paying the extremely high monthly rental rates charged by elderly care facilities, the aging-in-place option is appealing to a growing number of seniors.

6. The CARES Act foreclosure moratorium

Under the CARES Act, mortgage forbearance and a halt to evictions kept many in their homes that otherwise might have been forced to vacate. Even though the programs have ended, it does not automatically mean the homeowners who benefitted will need to put their homes on the market.

Michelle Singletary explained in The Washington Post in May: “People coming out of forbearance have a number of options. If they can afford an increase in payment, a repayment plan would allow them to spread missed payments over a specified number of months, added to their regular mortgage, Goodman pointed out [Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center].

If the borrower can afford only their old payment, a deferral might be the right answer, in which the delinquent balance is added to the back end of the loan. The past-due payments would effectively extend the term of the loan. If those options don’t work, borrowers might qualify for a loan modification, which would lower their monthly mortgage payment if they’re back to work but their income significantly dropped.”

7. A growing investor pool

It is no secret that real estate is one of the best investment vehicles out there. This past year, investors spoke with their feet, according to Patrick Clark of Bloomberg.

“Real estate investors acquired a record 18% of U.S. homes sold in the third quarter of 2021, wagering $64 billion that home prices and rents will continue to surge,” wrote Clark, who continued to explain, “Investors accounted for more than 18% of U.S. home purchases, a record. Low interest rates and a persistent shortage of affordable properties have pushed investors to stomach higher prices as they bank on rent growth and price appreciation.”

He also quotes Daryl Fairweather, chief economist at Redfin, who declared, “I largely attribute this to the decline of the middle class in America. The more the rich get richer, the more opportunity there is for investors to buy homes and rent them out.”

This is echoed by Martha C. White, NBC News, who stated in October, “In some markets where there are a lot of large institutional investors buying, they’re going to be targeting that lower median price home — that’s exactly the kind of home a first-time homebuyer will be looking to purchase … In some cases, they may be competing with a large institutional investor who may be offering all cash.”

As mentioned above, investor numbers are growing as mom-and-pop homeowners, flush with increased equity in their existing homes, are looking to join investor ranks and cash in on the market. Our team members have personally received a significant number of calls this past year from investor wannabes looking to get into the market.

8. The absence of “move-up” or “move-down” buyers

NAR numbers, released in November, 2021, revealed that the percentage of “First-Time” buyers moved upward along with a corresponding decrease in the number of “Move-Up” buyers.

Additionally, the average age of repeat (move-up) buyers reached an all-time high of 56 years old. Many potential sellers we talked to this past year concluded it was not in their best interest to sell their existing home. They gave a number of reasons:

  1. Those who purchased homes a number of years ago had low property taxes and, if they sold their existing home and bought a replacement property, would have significantly higher property taxes. As an example, in California, with Prop 13, taxes are relatively fixed at the purchase price. A home that sold for $400,000 20 years ago would have taxes in the range of $5,000/month. That same home could potentially sell in today’s market at $1,200,000 and would be taxed at a rate of $15,000 a year. If a homeowner wanted a larger home, then taxes would be exponentially higher.
  2. Seniors with fixed incomes who bought homes 40-50 years ago would love to sell their existing homes to downsize, but would have significantly higher property taxes even if they bought homes half the size of their current property.
  3. Many expressed a desire to move to either upgrade or downsize, but were very concerned that in the current market they would not be able to compete with well-healed buyers in securing a replacement home. With many homes in our market selling for hundreds of thousands over asking, many concluded they did not want to compete.

9. iBuyers, investors and direct buyers

Faced with the prospects of fixing up their homes, enduring throngs of visitors during showings and the overall hassles that go with normal residential sales, the idea of selling as-is for cash to an iBuyer or investor (either long-term renter or flipper) has grown in popularity.

Accompanying this trend is a growing number of buyers who are going direct to homeowners (either on their own or with an agent) and making offers homeowners cannot refuse — especially those looking to move out of the area. Consequently, a growing number of homes sell without ever hitting the market, further decimating the numbers of homes available for purchase.

10. New home builders are not keeping up with demand

In many ways, builders are still trying to recover from the Great Recession during which they halted production for a number of years. It has been impossible to effectively get things back on track with the diminishment of the qualified labor pool, dramatically increasing material costs and current supply chain issues stemming from the pandemic, wildfires and other natural disasters.

Consequently, occupancy dates are being pushed back repeatedly, and builders are falling farther and farther behind. Due to limited new home inventory, many who might have purchased newly constructed homes are being forced to look on the resale market instead.

Additionally, builders are beginning to ease off on efforts to cooperate with buyer agents, with some companies now refusing to provide any compensation to Realtors bringing in clients.

While any of these issues would not necessarily affect the market on their own, add them all together and we have achieved a tipping point resulting in epic shortages of inventory. It is my belief that, until a sufficiently strong negative factor (or two) enters the market (i.e. higher interest rates), we will continue to see a shortage of inventory for the foreseeable future.

Carl Medford is the CEO of The Medford Team.

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