I have been talking about low inventory for quite some time. As a current illustration of this fact I just compared the inventory of single family homes in Boulder County at the end of October from 2007 – 2014. Each year the inventory has decreased. In October 2007 there were 2124 homes for sale in Boulder County, this year we have 1194. This is a 44% decrease.
As the listings decrease the market power shifts towards the seller and away from the buyer. Buyers don’t have many choices so if they want to buy they compete for a limited pool of properties and end up paying more if there were more to choose from. Prices have been rising as a result.
To further illustrate the point I thought I would give a real life example of how few choices a buyer has in this market. Let’s look at the situation of two hypothetical buyers. The buyers are fictional but the searches and the results are true and accurate as of the later part of November 2014.
The Smith’s
The Smith’s are a couple in their late 20’s. They moved to Boulder three years ago and were both able to secure good jobs. They are off to a good financial start and have been able to save up a down payment and establish good credit. The price of their apartment has risen each of the last few years and they are ready to buy a make a home in Boulder. They are pre-approved for a purchase price of $200,000. So they have established their search criteria as: City of Boulder, 2 bedroom, 2 bath condo. They would love a covered garage space but they don’t want to be too picky.
The initial search turned up fourteen properties. But on further review seven of those are already under contract. Of those seven remaining properties, five are only available to those who qualify for and are interested in the City of Boulder Affordable Housing Program. The Smith’s make too much money to qualify for the program and since this is a stepping stone property for them they wouldn’t be interested in the deed restriction which limits their future appreciation. So in the end their are two active properties to consider in Boulder. Both of those happen to be located in the same complex. After looking at them they decide to keep looking since they don’t care for the interior hallways and the 1970’s styling of the complex.
So after 20 minutes of viewing properties they are forced to scan the internet and check their email for their Realtor’s automatic MLS search results. When a new property does hit the market they are most likely competing with many other buyers who are looking for the same type of property. If they do like it they will be forced to compete with multiple offers, leaning heavily on their real estate agent since they have only seen a few properties. It’s a very difficult situation for a first time home buyer.
The Walter’s
The Walter’s have been renting in Louisville for a year. The moved here to take a job and have enrolled their kids in school. This isn’t their first purchase and they are pre-approved for a mortgage of $375,000. They have $100,000 to put down, so their maximum price is $475,000. They would prefer a four bedroom home but would settle for a three bedroom if they had to. Their first choice is Louisville but they understand the tight market and are willing to look in Lafayette as well.
The MLS search for a price range of $400,000 – $475,000 in Louisville and Lafayette resulted in:
- Ten active properties. Nine in Lafayette and one in Louisville.
- Six listings that don’t already have a contract pending. All of these are in Lafayette.
- Three of the listings are new construction which the Walter’s don’t prefer since they are not yet complete and they need to move out of their rental by a certain date.
- So in the end they have three properties to view in Lafayette.
According to the U.S. Census the combined population of Louisville and Lafayette is 44,000 and there are 18,000 households. The median price for homes in Lafayette in 2013 was $399,000 and in Louisville it was $490,000. given this information you would expect to have more than three homes to consider at any one time. But that isn’t the reality of the market right now.
After one short appointment with their Realtor they have viewed all three possibilities and have ruled them out. They are now in the same waiting game as the Smith’s. They may need to extend their rental by a few months which will cost them more money.
The low inventory has made it very difficult for buyers to make proactive steps in their move. They don’t have choices, they have an undefined time frame and when an acceptable property does come on the market, chances are they will need to compete with other offers in order to win the bid.
The low inventory has also caused many would be sellers to stay put. The argument is “when I sell I won’t have anywhere to go”. Exasperating this is a very tight rental market. Rentals are very expensive and finding terms that allow for short term but uncertain stay is very difficult.
These are extreme but not atypical cases and highlight the need for an experienced Realtor who can help you navigate through the process. Currently I am trying to identify upcoming listings in a particular area on behalf of a buyer by sending out letters to a specific neighborhood. It’s a great place to live and a great place to own real estate but right now it stinks to be a buyer.
The chart below shows the home inventory by month over the past four years.
