The “Housing Theory of Everything” proclaims that housing is the single biggest factor driving our economic climate, including the persistence of wealth inequality. Those who own homes and other properties are ahead of the average American, as they can establish and grow equity. Real estate has long been the greatest generator of generational wealth, and that hasn’t changed.
But what happens when there aren’t enough properties to go around? As Business Insider posits, it’s a problem not just for would-be homebuyers, but for the economy at large.
Where did the shortage start?
Today’s housing shortage isn’t the product of the pandemic. It started over a decade ago as part of the reaction to the Great Recession (aka, the 2008 Housing Crisis). Though the real estate market wasn’t solely responsible for the economic devastation we saw, it was at the epicenter of the implosion. What we saw were shocking foreclosure rates, a glut of properties on the market, bottoming home values, and the shuttering or consolidation of many construction businesses.
Inventory has struggled to keep pace with demand since, a trend that propelled property values upward until they reached their boiling point during the COVID-19 pandemic. In 2021, the Fed finally acted against housing and economic inflation by increasing interest rates.
Unfortunately, the impact of this increase was stunted by a lack of inventory, which made it difficult to replace lopsided supply and demand.
But why is housing inventory so important to real estate and overall economic health? And, more importantly, how does it change your strategies as a real estate investor?
Major Reasons Why Low Housing Inventory Determines Economic heatlh
A lack of inventory drives up property prices
Supply and demand determine the cost of goods and services. Scarcity, as we’ve seen in the housing market, causes home prices to not only skyrocket but resist market correction. Both rising and stubborn home prices contribute to housing unaffordability, which in turn:
- Disincentivizes new homebuyers from taking on mortgage debt.
- Increases rental demand and thus, rental prices.
- Causes households to delay or reduce childbearing.
- Limits economic participation.
- Hinders generational wealth-building.
- Squeezes investor profit margins.
Fewer homes force rental demand up
Increasing rental demand is good news for investors who rely on SFR income. However, increased rental demand and, by extension, rental rates, pose similar problems for rental households as the housing market does overall. There are both fewer homes for would-be homeowners to buy and for investors to choose from.
As a result, rent has grown unaffordable for many. Investors are seeking to ease the frustration of an inventory-strapped market by turning to emerging investment models, such as build-to-rent.
Low inventory prevents oversupply
There are four stages in the housing cycle: recovery, expansion, hypersupply, and recession. Because of low inventory, we’ve effectively been “stuck” in expansion mode. This is true of the housing market even as we move through inflation and recession. We haven’t reached a true state of hypersupply since before the Great Recession.
That means that we won’t see extreme market correction as we would normally see. Tight inventory makes the market stubborn!
Unaffordability affects migration patterns
As much as people are able, they will move to areas where they can afford to live and work. An increasingly mobile and global workforce makes this possible. This is why we’ve seen increased migration to affordable real estate markets over the past several years.
Homebuyers and renters alike are prioritizing more suburban and rural areas, particularly in the South and Midwest. Although the ability to work remotely is waning for many as employers demand a return to in-person work, we see that employers are also favoring more affordable markets as demonstrated by the growing trend of businesses moving to Texas.
Housing affordability impacts long-term economic status
When housing is unaffordable, it prevents Americans from building wealth. Renting provides no equity and higher property prices mean bigger down payments.
This, in turn, means that it takes longer to save for a house or to reach career stability and income to keep up with mortgage demands. That’s not to mention the burden of other debts, like educational debt, that may plague new homebuyers and discourage them from taking the next step.
The tighter finances are, then, without the security of assets like real estate, the less households participate in the economy and the more they delay things like having children. That ultimately affects the future workforce and overall trends in supply and demand. It’s all a domino effect that we can’t ignore!
Investors, knowing that supply is a constant issue in the real estate world, would do well to explore alternatives like the build-to-rent model. They also must, now more than ever, be strategic in their choice of investment markets. They want to find markets that offer options while also providing reliable demand and value.
REI Nation has twenty years of experience in the real estate industry. Lean on our expertise when building your portfolio!