Low inventory and high demand have also caused home prices to increase by more than 5 percent every year for the past six years, which is great news for homeowners but frustrating for buyers.
Finding a solution to the limited number of homes for sale first requires understanding the reasons behind the limited supply. Those reasons include:
- Limited new construction: While 1.2 million housing units were built nationwide in 2017, according to the National Association of Home Builders, that is far less than the historical average of 1.5 million units per year. Given household formation increases and pent-up demand from a decade of limited new-home construction during the recession, construction starts should be 2 million or more annually.
- Construction of luxury properties: Not only is construction not keeping pace with demand, but builders are also developing more luxury-level houses than affordable houses. High costs of land and labor shortages are naturally driving prices up for newly built homes. In addition, builders find their tight margins of profitability are greater when they build more expensive homes.
- Zoning rules restrict higher density development: When land costs and labor costs are high, as they are in the Washington area, designing higher-density housing can be a solution for affordability. Many jurisdictions still have building-height and -density restrictions that hold back new development.
- Investors keeping properties as rentals: Investors snapped up single-family home foreclosures and short sales during the housing crisis, repaired them and converted them to rental properties rather than selling them. These rental properties might once have been starter homes for buyers.
- Homeowners becoming landlords: At the same time, an increasing number of homeowners opt to hold onto their property when they move. Becoming a landlord provides them with rental income to pay off their mortgage and for future retirement income.
- Homeowners with low equity: While the housing market has recovered on a national basis and in the D.C. area, there are still some homeowners with low equity. While these homeowners could probably pay off their mortgage in full if they sold their homes, they might not have enough equity to use for a down payment on the next property. Rising prices, which impact first-time buyers, also have an effect on move-up buyers who may be priced out of the market.
- Lack of available housing for sellers: A big factor holding back sellers is the fear of being unable to find something to buy, which feeds the cycle of low inventory. For some would-be sellers, renovating or remodeling their home makes more sense, particularly when they have a low-interest mortgage and like their neighborhood. For others, particularly empty-nesters who want to downsize, there are few residences that fit their desire to live in a particular area, have the features they want in a home or are affordable.
The solutions to these issues are as complex as the problems themselves. While builders are sometimes blamed for the lack of inventory, there is no question that limited, expensive land and a severe labor shortage hamper builders’ ability to ramp up supply.
Jurisdictions need to balance the desire for green space with development and address transportation needs to maintain livability. Investors and homeowners will need to be convinced of the financial and lifestyle benefits of a property sale before we see an increase in listings.
In the meantime, home buyers can anticipate competition for properties in the coming months. To ensure a successful transaction, they should prepare themselves now for the purchase with a strong pre-approval and work with an agent who can help them in their search.
David Charron, chief strategy officer of Rockville-based multiple-listing service Bright MLS, writes an occasional column about the Washington-area real estate market.