Drop in Home Inventory Slows High Demand

The spring residential market is showing what happens when inventory is low and buyer demand is high. Bidding wars become common, buyers shift down from dream homes to what they can afford, and buyers at least temporarily walk away from the market.

Early Spring Numbers

The developing and on-going story is that resale inventory remains low, new construction isn’t making a dent, and buyers are becoming weary of competing with each other. This caused a change in early spring trend numbers. According to Redfin, a national real estate brokerage, demand by homeowners fell 14 percent from February to March.  The demand is still strong coming off a record high in January. However, buyers bolstered by a continuously improving economy expected a tight spring market but were surprised to find how few homes were actually on the market. Redfin’s tracking of 15 metropolitan areas shows 12.5 percent fewer homes for sale than in March 2016.

These are soft numbers. The number of property viewings buyers requested fell 5.5 percent in March. More importantly, the number of purchase offers submitted fell 23 percent. This is despite the fact that sellers aren’t accepting the first reasonable offer made. Sellers are anticipating bidding wars. Bidding wars mean that multiple offers are being made by the same pool of buyers for a particular home. Still, the number of purchase offers is way down.

Many people in the buyer’s market are reporting feeling apprehensive. The strong-minded are trying new strategies. Some have given up on viewing dream homes at the top end of their preapproved mortgage. Instead, they are looking at houses listed for tens of thousands of dollars below what they are approved for. This strategy leaves them a cushion for the inevitable bidding war.

Hard Numbers

Rather than requested viewings by prospective buyers, mortgage applications are a better indication of actual (springtime) pending transactions. However, refinance activity must first be sifted out. Due to higher interest rates, refinance applications fell 34 percent from a year ago according to the Mortgage Bankers Association.

Still, due to high demand, purchase mortgage applications are remaining steady this spring. The most recent numbers actually indicate a meager 0.4 percent increase in purchase applications over last year.  That implies the buyer demand remains strong. Buyers are less concerned about rising interest rates and more concerned about locking in one of the few houses on the market.

Where’s the Money Parked?

The Millennials represent a large portion of first time buyers in today’s market. That represents new money flowing into the market rather than equity rollovers into second or third homes. Millennials have savings even if they can’t plop it down on a home. Interestingly, the tight real estate market is convincing them to shift focus with this cash towards retirement planning. If they can’t invest in a home, they must look elsewhere.

Millennials have come of financial-age during years of near zero interest rates. Certainly interest paying less than inflation. With no home in sight, they need to find ways to make their money grow. Much of this money is shifting out of cash ready savings into less liquid stocks and bonds. A few industry experts believe this mostly readily available cash may being waiting to see what happens during the normal autumn slowdown of the housing market. It’s possible that appreciating spring and summer sale prices accompanied by bidding wars will draw enough new listings onto the market to shift the balance towards buyers (at least slightly). If that happens, there may be a stock sell-off when cash flows out of the stock market to support a seldom seen autumn housing sales peak.

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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for eleven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.