Shrinking Inventory Hits First-Time Buyers Hardest

By Gino Blefari
President & CEO
Intero Real Estate Services, Inc.

Despite many positive signs in the California housing market this year – increased sales, higher values, fewer foreclosures – there’s one looming issue that’s creating problems for first-time home buyers in particular: inventory.

Not long ago we were worried about shadow inventory, the prospect of a large amount of foreclosure homes coming to market at the same time. But the real problem right now continues to be shrinking inventory of homes for sale – especially those at the lower price spectrum, which tend to be the ones commonly sought by first-time buyers.

According to Zillow, the inventory of lower-priced homes for sale in California has dropped by more than 42% over the past year. The state had the biggest reduction in homes for sale across all three price tiers, with lower-priced homes in Fresno (-59.7%), Sacramento (-55.4%), San Francisco (-53.2%) and Modesto (-50.5%) seeing the largest reductions.

At the national level, there were 15.3% fewer homes for sale in the bottom price tier over the last year.

Like a delicate rain forest ecosystem in which each life form contributes to the whole, first-time buyers play a key role in the housing market, which is why we need to pay attention to the problem.

Zillow notes that many more investors are in the market right now, gobbling up properties in the bottom price tier and often with cash, which makes them more competitive than a typical first-time buyer.

Another factor contributing to shrinking inventory is underwater owners – those who now owe more on their mortgage than their homes are worth. Being underwater limits an owner’s ability to sell, which can keep more inventory off the market.

Take all of these circumstances and layer on the fact that builders have put fewer new homes on the market these past five years. The recipe is not great for first-time buyers.

However, a lot of positives still exist in supply constrained markets. The biggest thing first-time buyers have going for them right now is cheap financing (interest rates for mortgages amazingly are still at some of the lowest levels in history). Also, prices are still very affordable in many markets for first-time buyers.

Because of these factors, I don’t think we’ll see a drop-off in demand anytime soon. It’s just going to take longer for buyers to find that first dream home.

In times like this, the services of an exceptional agent will also help in the search. When tight inventory is a market reality, it means you have to be armed with as much pricing information as you can possibly gather in order to place the most competitive offer. And you need to move fast when you find a house you like.

Another thing that can really help first-time buyers compete in supply constrained markets is getting pre-approved for a loan, not just ‘pre-qualified’. This makes the offer process much faster and helps to show sellers that yours is a viable offer that will pull through.

It’s never been more important for buyers to start the process fully prepared.


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