Low Inventory Shouldn’t be a Zero Sum Game

 

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Part 3 in a Blog Series on the Great Shrinking Inventory

Still hot on the trail, trying to find answers to the mystery behind Real Estate’s Low Inventory woes.  Or to put it in the vernacular:  Why more Sellers aren’t Selling!

My short list of culprits contributing to the great drought of listings we’ve experienced over the last four years reads as follows: 1) Lack of new supply being built 2) Big demographic shifts in aging 3) The symbiotic relationship between a tight rental market and a tight purchase market 4) Tightening regulations around mortgage lending and changing perceptions about debt.

Continuing on…Here’s the thing about residential real estate: It’s almost never a zero sum game. When a Seller sells a home and a Buyer buys it, that’s not really the whole equation.  Because that Seller also needs to buy something else (unless they have died).  And that Buyer is also coming from another place he/she just sold (unless they are a first time buyer).

In the past, the amount of available inventory at any given time has often been a function of just how easy it was for Sellers to make the transition into becoming Buyers and vice versa. How fluid the mechanisms of change were.

For most of the last thirty years I’ve been doing this,  our local market has been fueled by move-up buyers.  Buyers transitioning into new and often bigger and better living situations as their lives and jobs were growing and their needs were expanding.

The typical move-up story goes something like this:  A young person in their twenties or early thirties finds a way to squeeze into a home. Any home. Maybe a small house in a dicey location. One that needs work. Or perhaps a condo, priced lower than a single family residence. Maybe parents gift him some money, so he can establish a foothold in the market.

This First-time Buyer lives in the property for a reasonable length of time. And takes advantage of the mortgage interest/property tax deductions while he’s working his way up in his profession.  He gets married and has a kid over the next five years.

Then, it’s time to move-up.  Leveraging the equity gained from home improvements and rising market prices. Using it as a downpayment for the next place. Bigger. Better location. Larger lot. More amenities.

The next house serves their lives well for another reasonable period of time and then…guess what. It’s time to move-up to the next house using the new equity it has gained. Depending on the strength of the market and the size of the job, it’s possible that this third property is the last stop –  the house that will work for the next twenty or thirty years.

Sometimes one more move-up is required to reach the upwardly mobile dream house.  But whether it’s third or the fourth home, along the way, no one is thinking much beyond twenty years into the future.  In the past, not that many people were living healthily into their eighties like they are now.

In those robust move-up markets of yesteryear, there were always lots of Sellers becoming Buyers and Buyers becoming Sellers within the same marketplace. The existing inventory turned over much faster.  The average length of time people spent in their primary residences was shorter.  Instead of 7 years it might be five or even less. There was always something new coming onto the market that was worth buying.

Until there wasn’t. Next week:  The move-up market runs head first into a move-down market.

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