There’s a lot of demand from home buyers, but a low supply of homes available
Why the high demand?
Factors behind the demand are somewhat easy to identify. Over the past several years, the U.S. economy overall has performed solidly, adding jobs at a steady pace. Lately, this growth in employment has been accompanied by decent gains in wages, as well. Helping the demand more is that mortgage interest rates are still low, even with the rise over the past few months, this helps buyers stretch their home buying dollar even further. Added demographic tailwinds are helping keep the home buying demand high as well. Millennials are the largest generation in history, and are just come to an age where they are considered to be in their “prime home buying years”. Many have established their careers, are beginning to settle down, and choosing to start families which pushes them to choose to purchase their first home. Alongside them we have seeing an additional demand from older homeowners looking to upgrade or downsize, depending on their situations.
The low inventory situation.
The high demand itself isn’t helping the market build up an inventory, in many markets, homes are sold as soon as they’re listed. A second driver of low inventory has been the weak new construction activity. This lack of new construction is impacting markets in several ways. One way is it’s helping push up the prices of newly built homes and the overall age of homes that do sell. With little new construction, yesterday’s new homes aren’t being replaced by today’s new homes.
Another contributor to low inventory is the negative equity rate, the share of homeowners with a mortgage that are underwater, owing more on their home loan than their home is worth. The national negative equity rate has fallen consistently over the past few years, but remains high at 10.5 percent. Put another way, 5.1 million American homeowners are underwater on their mortgage – and it’s likely many of these 5.1 million Americans would choose to list their homes for sale if they could, except being underwater can make it incredibly difficult, if not impossible, to sell. The only real options are to undergo a risky and lengthy short sale, or bring some of their own money to the closing table to close the gap between what is owed and the selling price. What’s more, lower-end, more entry-level homes of the kind most likely sought by first-time and younger buyers are more than twice as likely to be underwater as more expensive homes, contributing more forcefully to inventory woes at the bottom.
Finally, homeowners themselves could be contributing to the lack of inventory simply by not listing their homes for sale. As it stands, the housing market right now is very much in sellers’ favor – for the most part, they can expect to get very close to the price they’re asking for, and sell in a relatively quick window. But most sellers, once their home is sold, must turn around and become buyers themselves. And, as noted, it’s tough out there for buyers. The rising mortgage interest rates, may be giving some current homeowners pause as well. When the rates rise, current homeowners may find that their mortgage payments on a home very like the one they’re already in will become more expensive. So many homeowners decide to stay put instead.
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