First-time homebuyers are finally ready to jump into the market. They’ve met tougher mortgage qualifying standards in recent years, they’ve saved up for down payments, they’ve done their homework and know what they can afford.
But can they actually find a home?
The biggest problem facing first-time homebuyers these days is the low inventory of homes for sale in the starter home price range.
“That’s a real problem,” says Nela Richardson, chief economist for Redfin, a national real estate brokerage. “Just because you got financing doesn’t mean you get a home. It’s a hard market.”
According to the National Association of Realtors, the number of homes for sale nationwide at the end of November 2016 was 9.3 percent lower than it was a year earlier, and the year-over-year totals have been dropping for the last 18 months. At the current rate of home sales, the inventory is only enough to last four months – short of the six-month inventory for a balanced market of homebuyers and available homes.
And these numbers are for all home sales. The inventory of homes for sale at the lower price ranges is even smaller, and the squeeze is particularly acute in cities such as San Francisco, Seattle, Denver and Boston. But even in other cities, popular neighborhoods can be a challenge.
“We haven’t seen an increase in the starter-level inventory since 2009,” Richardson says. “That’s been the biggest problem in the housing market recently.”
An analysis by the real estate portal Trulia found that only 24.8 percent of the homes for sale at the end of 2016 were in the starter price range (defined as the lower third of all home values per market), and that number was 12 percent lower than at the close of 2015.
A number of trends are keeping down the number of homes for sale in lower price ranges:
Fewer single-family homes are being built, especially starter homes. Builders cite tight credit, difficulty finding land and, most important, a severe shortage of labor. While the National Association of Home Builders expects to see 10 percent more single-family homes built in 2017, the number of new homes is still likely to fall short of demand. According to U.S. Census Bureau data, the median price of new homes sold in November 2016 was $305,400, and the average price was $359,900.
People are staying in their homes longer. From 1987 through 2008, Americans stayed in the same home for six to seven years. But that number has been rising, and according to NAR data, the median time Americans lived in the same home was 10 years in 2016. “That’s why we think that this inventory problem is persistent,” Richardson says. “We’re seeing that people are staying in their houses longer.”
Investors are holding on to their starter homes. The percentage of investors as a share of existing U.S. homebuyers has declined as prices have risen. Investors bought 12 percent of the existing homes sold in November 2016, down from 16 percent in the previous year, according to NAR data. But with rents at an all-time high, investors aren’t selling the inventory they already hold, and they are more active in lower price ranges, Richardson says.
While the low inventory doesn’t make it impossible to buy a home this year, it makes things more challenging. Buyers need to be prepared.
“You’re going to lose out on a few homes,” says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York. “You might have to temper your wants. ... I think you just have to be more patient and know that it could be a frustrating process.”
Here are seven tips for buying a home in a low-inventory market:
Get your mortgage before you find a home. Meet with a mortgage broker before you even look at homes. Make sure your credit is what it should be and you provide all the necessary financial information for underwriting before finding a home and making an offer. “All the bank has to do is fill in the sale price,” Richardson says.
Start early. It may take longer to find a home, plus you need to pinpoint exactly what you want so you’ll know it when you find it. Chicago-area agent Richard Harty, broker-owner at the Harty Realty Group in Highland Park, Illinois, closed a deal this month for a couple who began searching for a home in July. They started looking in several neighborhoods, then zeroed in on the area they wanted – which they identified during their long search. When they finally found a home, “They were confident they were buying in the right neighborhood,” Harty says.
Have your own real estate agent. In a tight market, you need someone who is advocating for you, not juggling loyalties to both you and the seller. Using an agent usually does not cost the buyer anything, and buyers may want to sign a contract with an agent to cement that loyalty. “Make sure that somebody’s representing your interest,” Harty says
Line up your professionals early. Once you find a home, you will need to move quickly on inspections and closing steps. Line up inspectors and closing agents or attorneys when you start looking.
Be ready to move quickly. Richardson predicts that buyers will move even faster than they did last year, when homes stayed on the market an average of 52 days, and that was the shortest amount of time since Redfin began collecting data in 2009. When you find a home you like, it’s often smart to tour it the day it goes on the market and make an offer immediately.
Start saving money. If you end up competing with other buyers for a home, an offer with a higher down payment often looks better to a seller. You also can offer a higher earnest money deposit to be competitive. “Put yourself in the best possible position,” Harty says. “It just shows a stronger candidate. The strength of your offer really is important.”
[See: The Best Apps for House Hunting.]
Don’t buy a house you don’t want. While you may end up buying a home that doesn’t have every feature you wanted, don’t buy a home you’re not happy with. “At the end of the day, once you close, it’s yours,” Harty says. “There is low inventory, but there’s more homes coming to the market every day. It comes down to your gut. At the end of the day, you just have to know that you’ll be happy.”