Tired of the low housing supply? Consider these strategies
Slugging it out in the real estate arena
If you’ve been shopping for a home, you may find that the pickings are slim. That’s because housing supply is not keeping up with demand in many markets. Fresh data show that there simply isn’t enough inventory to satisfy the public’s hunger for homes. And that drives home prices up, making things even trickier for buyers.Verify your new rate (Feb 22nd, 2018)
Explore different buying options
But if you have your heart set on owning, there are other tactics you can pursue beyond purchasing a resale single-family home, trying to outbid other buyers, hunting for new construction, and overpaying for a home.
Options include teardowns, infill building, rent-to-own opportunities, and being a live-in landlord. Each has its risks and rewards.
Explore all the options, learn the facts, and look to real estate and mortgage experts for guidance.
Numbers don't lie: housing supply and demand
The low housing supply status doesn’t look like it’s going to improve anytime soon. Per new research from Redfin, the number of homes for sale fell 11 percent in July. That marks 22 straight months of year-over-year inventory reductions.
The good news is that there was a three-month supply of homes in July, up from 2.5 months in June. But that’s half the amount experts like to see. (Redfin suggests that a six-month supply indicates a healthy market balanced between buyers and sellers.)
Meanwhile, the National Association of Realtors reports that there were 1.96 million resale homes available for sale at the end of this year’s second quarter. That’s 7.1 percent lower than the 2.11 million homes on the market one year earlier.
What's out there?
A few factors are contributing to low supply. First, more buyers are competing with each other because the economy is strong, employment rates are robust, incomes are up, and low mortgage interest rates persist.
Also, most listed homes today are older homes. Builders are not crafting enough inexpensive new construction to meet demand. Plus, current owners are hesitant to list their properties for sale. They’re choosing to stay put because they’ll likely have to pay a higher price for their next home.
“The greatest supply constraints are at the lower end of the market. This disproportionately impacts those who can least afford home ownership,” says Adam Gower, real estate professor in the Orfalea College of Business at California Polytechnic State University, San Luis Obispo.
“This means that homes at the lower end of the market are subject to the highest demands and highest price inflation. That drives affordability further away from working families.”
If you’d prefer and can afford a newly-built home, you may not have a lot of choices in many markets. But there are two options to ponder. The first is building on an empty lot.
Infills are new homes built on old lots in established neighborhoods. Infills can occur when community planners make underused land (for instance, an old parking lot or easement) available for building. Infill homes can be tall and narrow when slipped in between existing houses.
An infill lot could be a good buy, especially in a desirable neighborhood.
“If the lot is purchased at a favorable price, it could prove to be a good investment,” says Mark Lee Levine, professor at the Burns School of Real Estate and Construction Management, University of Denver.
He notes that you could choose to hold the lot until you’ve saved more money to build on it. Or, you could always sell the lot later if your plans fall through.
The second option is a teardown. This involves buying an older, rundown home in a preferred neighborhood, razing it, and building new on the site.
Mortgage products like the FHA 203(k) loan or Fannie Mae's HomeStyle® mortgage allow you to wrap in your property purchase plus the costs of rebuilding.
Either approach “can work very well if you are willing to accept that there will be hidden costs and concerns,” says Levine.
These costs and concerns can involve getting the necessary permits and a build that costs more than expected. There can also be construction delays. Plus, interest rates may rise and the local housing market may suffer while you’re waiting for the home to be completed.
“This strategy is better for the higher end of the market and for those with consistent income streams from other sources,” says Gower.
Become a landlord...
Two other options that can speed your path to owning actually involve renting.
The first involves buying a two-, three- or four-unit multi-family rental property. You occupy one of the units as your primary residence and rent out the rest. The rent monies you collect may cover some or all of your monthly mortgage and housing costs.
“This is the most affordable way in to home ownership,” Gower says. “The tenants help pay your mortgage, and you get to choose who your neighbors are. And you can always move out when the time is right to buy a single-family home. At that time, you can either rent your own unit out or sell the whole property.”
...Or, rent to own
The second option is renting a home that the owner may be looking to sell.
“There may be homes for rent in your chosen area, and the given landlord might consider a lease with an option to buy,” Levine says.
Lease options are two-part contracts -- a rental agreement and a purchase agreement. Normally, in exchange for upfront "option money," a higher-than-market monthly rent, or both, you get the right to purchase the home at a later date for an agreed-on price. If you fail to exercise the option in the time provided, you lose your option money.
Lease options can be complicated. Enlist the help of a real estate lawyer. In addition, have the property appraised and inspected, so you get what you expect with your purchase. Finally, get pre-approved for a mortgage so you know you'll be able to exercise your option and obtain financing.
Don’t lose hope
Prepare to be proactive and creative in your strategies to finding and buying a home for the foreseeable future, say the pros.
“It seems unlikely that the housing supply is going to increase very soon,” said Gower. “So the demand side of the equation is likely to be the first to adjust, probably through rising interest rates and possibly through a slowdown in the economy.”
What are today's mortgage rates?
Today's mortgage rates provide the bright spot in a difficult real estate market. While property prices are on the rise and competition is tough, at least current mortgage rates make housing easier to buy than it would otherwise be.Verify your new rate (Feb 22nd, 2018)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.