Many people interested in buying a home in the early months of 2021 were surprised to discover a compound problem: great low interest rates were bringing many interested buyers to the market, but not a lot of homes were available on the market, limiting choices and driving high competition for each individual house.
The market factors that create seller’s and buyer’s markets are pretty well understood, but one factor that throws the system out of equilibrium is a lack of supply of houses. When there aren’t enough houses available, various outcomes can come up:
- Buyers who qualify for only a modest mortgage are priced out of the available housing stock, or realize that they are getting a good enough deal from renting that it’s worth it to stay out of the housing market.
- Buyers with cash offers and the willingness to waive valuable contingencies in their contracts, like inspections, have more attractive offers and are more likely to actually “get the house”
Buyers who aren’t thrilled with the houses available but who need somewhere to live soon end up paying more than they are happy paying, for homes they must commit to very quickly, and potentially creating a long-term debt for a home they aren’t happy to live in.
Luckily, there are also a few factors in play that could loosen the crazy low inventory issues soon. Just a few of them suggested by a variety of top real estate agents include:
- Bidding wars, some of the biggest drivers of the high sales prices, are likely to peter out. Bidding wars made sense when high sales prices were a surprise. However, eventually when most buyers are jumping into the market with knowledge of what is going on, these are going to be buyers who are motivated but know when to walk away from a deal that isn’t likely to be good for them.
- While there’s no telling when it will happen, interest rates rising will eventually cool some buyer interest. Other buyers who are realizing that even a low interest mortgage isn’t really worth it for an overpriced home are also delaying their purchase, cooling demand further.
- Affordable housing, whether it be out of high-demand suburbs or urban downtowns, is gaining ground as families notice they can barely afford the homes in one neighborhood but can choose from many options in less hot spots.
No matter what eventually loosens the inventory shortage, no sellers’ market has yet to stay forever. Even the many shifts in market demand this year aren’t enough to create runaway demand forever, and many signs point to growing inventory over the coming months and years. If nothing else, excellent sale price stories are pushing more owners who have options for where to live after selling to consider selling now, before we discover if these prices will hold or are part of a substantial bubble. While prices might realistically not come back down much, they can certainly slow if fewer buyers are desperate enough to get a given house that they get into bidding wars.