Though the factors that sway the rise and fall of the real estate market can be varied and complex, there’s no denying that housing inventory is among the most impactful. As one of the most significant talking points among investors and real estate professionals, we must all understand how inventory impacts what we do – and the industry.

7 BIG Ways Housing Inventory Matters

#1 – Price Trends

Unsurprisingly, inventory controls price trends. After all, supply and demand are at the heart of our economic system, and real estate is no different. When inventory is tight, prices rise. Even in our current climate, where many would-be buyers hold out for lower interest rates, supply is so low that prices still rise or hover around all-time highs.

We’ve all noticed how prices have largely refused to budge despite efforts by the Fed to temper the market through interest rates. Though their actions reduced demand, inventory has been so squeezed that it hardly made a difference! 

#2 – Competition Among Buyers

Inventory also impacts competition. When there are multiple offers on properties, the prices inevitably rise, too. Some sellers price low to spur on that competition, which can often spin out of control and lead buyers to overpay. When more options exist, buyers feel they can afford to wait and weigh their options. Slim pickings mean throwing more elbows. Investors must be more strategic with their offers to prevent blowing their profit margins.

#3 – Rental Demand

The real estate market as a whole isn’t limited to buying and selling properties. The rental market is intrinsically linked to it – and by extension, so is housing inventory. Higher prices and increased competition mean buyers get squeezed out. What do those buyers do, then? They rent instead. So, while it’s arguably more challenging for investors to buy at reasonable prices, the rental market grows accordingly. There’s a larger pool of residents looking to rent, and investors, in turn, adjust rent prices relative to demand. 

Now, this can be a double-edged sword. Primary markets like New York City certainly feel the Catch-22. Renting is the norm in NYC, but when wages aren’t keeping up with rental prices, people are driven out of the market entirely. It’s not abnormal to see 300 sq. foot apartments going for over $2,000 a month. As an investor, consider the long-term sustainability of the markets you invest in.  

#4 – Construction Activity

We’ve discussed before how today’s inventory crisis is primarily the result of changes in the construction sector after the Great Recession. When the housing market crashed, construction companies crashed with it. Thousands of businesses shuttered or consolidated. While there was an immediate glut of properties, new construction never truly rose to meet market demand when it returned. Even so, inflation and rising construction costs pushed builders to focus on higher-end and luxury homes, exacerbating the squeeze on the entry-level inventory.

Though the construction sector is working to make up for lost time – and inventory – they’re still struggling to add enough homes to the market to tip the scales of supply and demand.

#5 – Time on the Market

In a low-inventory market, homes tend to sell more quickly as buyers act promptly to secure available properties. For the investor, this stresses the importance of due diligence and preparing as much as possible ahead of time for a property acquisition. Priorities are often on the best bid that can be closed quickly. In a high-inventory market, homes may take longer to sell, and sellers may need to be more patient or make price adjustments to attract buyers. There’s more leverage for the buyer when the sellers are motivated and not seeing as much interest.

#6 – Effectiveness of Price Correction

Interest rates have more than doubled since their historic low (under 3%!), all to ease inflation and deal with the exorbitant prices of real estate. Though the pace slowed, prices dropped in a handful of markets. Typically, this strategy is pretty efficient. However, the impact is minimal when dealing with low inventory and high demand.

#7 – Ability to Find Deals

There’s a pervasive idea among real estate investors that their success depends on their ability to buy cheap. While this is true of some strategies – like flipping – it’s not true for all. Every investor should be mindful of their KPIs and income margins. The numbers matter. In a market like this, the chances of finding a diamond-in-the-rough property are slim. And investors can’t afford to twiddle their thumbs until inventory catches up.

Instead, target below or near the median for your investment market of choice. Deals aren’t always easy to come by, so don’t hinge your strategy on them!

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