- Limited supply increases cost with demand. Prepare your buyers for every likely scenario to manage their expectations and have a happy home purchase.
We’re in a housing shortage. Real estate agents already know this. Clients, on the other hand, might not. If clients aren’t properly educated on the consequences and effects of the shortage, they may be upset at some of the less than thrilling outcomes of their agents’ work.
So, educate them.
Below is the cheat sheet of common questions clients may ask. Try circulating this material as an educational memo to clients or just dealing with each question as they come up. Either way, clients are much more likely to trust their agents’ judgment if they understand their reasoning.
What is an ‘inventory shortage’?
Land is fixed. It doesn’t move. And if all the space in an area is filling up, a town can’t simply “import” more land.
Houses are also fixed. Ordinarily, they stay right where they are. If 100 families want to move into an area, but there’s only 20 homes, then prices will rise because demand is higher than supply.
On the other hand, if there were 20 families and 100 homes, prices would fall because supply is greater than demand. Because real estate doesn’t move, brokers unfortunately can’t import real estate from another area to keep prices stable.
Currently, demand is higher than supply, so prices are up.
Why is there a shortage?
Answering the question of why there is a shortage involves some research but also some speculation.
(Go here for more specifics on the reasons for the shortage.)
The economy
The main influencer is the general state of the economy. Both low unemployment and a strong economy encourage buyers to get in the market and raise demand, but that same demand encourages sellers to hold on to their land as their prices go up.
Also, sellers are likely sitting on a low interest rate, and they are reluctant to sell their house only to jump into a tight buying market.
Furthermore, builders are also not motivated to greatly increase the supply of homes as the prices go up because it’s only the buyers who are feeling the pinch.
The boomers
It seems like everything always comes back to the baby boomers, and this is no exception. Once more, we’re looking at a baby boomer-millennial face off.
A recent realtor.com survey showed that 85 percent of baby boomers are reluctant to sell in the next year — they aren’t in any rush to give up the neighborhood they’ve invested in for so long.
Millennials, meanwhile, want those very homes the boomers are holding on to. But again, with the strong economy and rising prices, there’s little reason to sell in the short term.
The zoning laws
In particular, millennials are looking for entry-level housing — and this is where the market is the tightest. It would make sense for builders to simply make more of those style homes, however, builders in many areas are coming up against restrictive zoning laws.
Tight regulations make it difficult to build smaller homes and currently restrict some modern technologies that would expedite the building process.
When will it end?
No one knows really. Any prediction is three parts speculation and one part science. Hopefully zoning laws will open an opportunity for more construction. Some are hopeful the shortage will end by next year.
What should buyers do?
Buyers should make a list of their needs and must-haves. Help them narrow their long list of vague desires to concrete needs because those may be all they can get. Encourage buyers to lead with their best offer; in the likely event that there are multiple buyers bidding, low offers will probably be ignored.
Sellers can sit back and enjoy the show.
Jackson Cooper is a writer and real estate enthusiast at Jensen and Company. Follow Jensen & Company on Twitter or Facebook.
