"As inventory remains limited, home values are likely to appreciate across most U.S. markets. Be sure that your strategy will accommodate the volatility that comes with rising home values and limited inventory to avoid the temptation of speculation."
Late last week, Realtor.com released its “State of the Housing Union,” an annual report published shortly prior to the president’s State of the Union address. The association stated, “The housing market outlook is looking bright on several fronts: strong buyer demand, particularly among first-timers, and a growing U.S. economy urging more consumers to buy.” However, analysts warned, “a housing shortage is also proving to be a major obstacle to achieving homeownership.”
The Dichotomy of the Housing Inventory
Inventory issues can be a blessing and a curse for housing markets. After all, when there is a strong demand for housing, home values tend to rise. With much of that demand coming from first-time buyers and Millennial households, though, the existing housing inventory on the market is often financially out of reach and, to further complicate matters, most builders are opting to build at higher price ranges than first-time buyers can afford.
Joe Kirchner, Realtor.com’s senior economist, said, “Builders will need to focus more on homes geared for moderate incomes, partner with the government on initiatives to transform distressed urban neighborhoods, and overcome labor shortages” to address this volatile inventory-related issue.
Dennis Cisterna, CEO of vertically-integrated single-family service provider Investability Solutions, warned housing demand has a ceiling if the buying population slows down its acquisition, as must eventually occur if the first tier of homebuyers (largely Millennials and first-time homebuyers) are priced out of the market. “Obviously, a big part of what drives prices is supply and demand, but no market can sustain that price growth if the right inventory is not available,” he said.
According to the U.S. Labor Department, housing sales volumes grew only about 1.1 percent during 2017 despite low levels of unemployment. Compared to 2016, when sales volumes rose 3.8 percent, this was a big drop. Housing inventory levels fell 8.8 percent over the course of 2017 as well, following a 10.7 percent drop in 2016. Home prices rose 5.8 percent nationwide during 2017, compared to 5.1 percent in 2016.
“Strong demand and weak supply continue to set the tone for the industry,” Kirchner said. Investors who can renovate inventory and then assist with financing or sell at affordable prices to first-time buyers will not only have the ability to tap into a strong buying population for their homes but also contribute to the health of the overall housing market in their area.
As inventory remains limited, home values are likely to appreciate across most U.S. markets. Be sure that your strategy will accommodate the volatility that comes with rising home values and limited inventory to avoid the temptation of speculation.