As first-time homebuyers enter the market, they are finding a dearth of housing inventory, which pushes prices up and reduces their purchasing power, Bloomberg reported. The market for entry-level homes has tightened over the past 12 months and the decline in housing availability is leading to a drop in first-time homebuyers. The National Association of Realtors noted first-time homebuyers represented just 28 percent of total housing sales for existing homes in June – a 12 percent decrease from its normal level.
Since more buyers are coming into the market to take advantage of low mortgage rates, competition has been heating up, resulting in bidding wars for homes. These factors combined will most likely drive up prices even more and push other buyers out of the market. As the market becomes more competitive and consumers choose to rent instead of buy, real estate investors should consider purchasing investment properties to increase supply for single-family rentals and other housing.
According to an analysis by real estate brokerage Redfin, new listings for U.S. homes for sale in June dropped 6.2 percent from the previous month. Despite the inventory rising 7 percent overall in the housing market in June compared to the same period last year, many first-time homebuyers might consider prices too steep for their budget and opt to rent properties instead.
“There is inventory coming on line, albeit slowly,” said Nela Richardson, chief economist for Redfin, according to Bloomberg. “The problem is it’s not equally distributed. There is more turnover at the higher end. At the more affordable end of the spectrum, people are stuck.”
Denver sees low-end housing inventory cut in half
Certain metropolitan areas have seen greater drops in inventory compared to others. One of the regions hardest hit by tighter housing supply is the Denver area, which has experienced a double-digit plunge in entry-level housing. Redfin noted that while upper-end inventory grew 4 percent in June, entry-level housing was cut in half compared to the previous year.
Caroline Grote, a Denver resident, described the economic situation in the area as a “landlord’s market,” but that it was difficult to find rental properties because online listings are snatched up quickly, The Denver Post reported.
Ron Throupe, an associate professor at the University of Denver’s Burns School of Real Estate and Construction Management, said the inventory reflects mostly standard apartments.
Changes in Dallas housing market
The only metropolitan housing market with even fewer homes in the low-end housing category is the Dallas-Fort Worth area in Texas, Business Insider reported. Low-end housing accounts for 15 percent of Dallas-Fort Worth’s housing market. In contrast, 55 percent of the region’s inventory is categorized as top value, which is one of the highest percentages nationally for major metropolitan areas. The middle tier for Dallas-Fort Worth reached 30 percent, which is around the average for other housing markets. Since there is high housing demand and low supply, housing prices might go up, which could squeeze first-time buyers out of the market, and cause them to rent instead of buy.
“Tight inventory is especially pronounced in the lower end of the market, which we define as the bottom third of the housing stock,” said Svenja Gudell, director of economic research at Zillow.
As the housing market in Dallas and other metropolitan areas experience a drop in supply in low-end inventory, investors may want to put money toward rental properties to meet demand for housing as inventory slowly comes online. The rental market is heating up as investors buy houses that could be renovated or upgraded to suit tenant’s needs. Tenants often look for single-family homes to live in to save money before buying their own home. Investors looking to enter the rental housing market should consider working with a company that is knowledgeable about the areas that are the most profitable and willing to answer questions about investing.