Buyers Encountering a ‘Perfect Storm’ But Not in a Good Way

When I bought my first home, the fad at the time was to purchase a fixer-upper at a good price then rehab it to death building ‘sweat-equity’ right away and increased value over time. But the fascination with finding a bargain seems to have lost its cache. I’m thinking that homes in need of TLC will be trending again soon as prices and interest rates slowly climb.

I know I’ve talked about optimal market conditions in the past. Ideal circumstances are rarely the same for home buyers and home sellers. Considering the persistent lack of inventory, experts are inclined to declare a Seller’s Market for early Spring. We are seeing support in the industry and among home sellers to confirm that.

Hopefully a shift is on the horizon but for the time being first-time home buyers, who customarily make up a are substantial portion of the home buying market, are being steadily squeezed out.

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According to Trulia data, entry-level housing prices have increased at a faster pace than overall home prices, a whopping 9.6%.

Builders are concentrating on producing upper-mid to luxury range housing. However they are experiencing a shortage of skilled labor and turn-times are running twice to three times longer than in the past. The expected trickle-down activity due to a surge in New Construction just hasn’t happened yet.

Buyers Confronting ‘Perfect Storm’: Trulia

By Suzanne De Vita

First-time homebuyers are in for it this spring, with an all but depleted inventory at their price point, according to the Q1 2018 Inventory and Price Watch from Trulia. Their challenges, however, are more than scarcity.

“First-time homebuyers face a perfect storm this spring,” says Cheryl Young, senior economist at Trulia. “Affordable, move-in ready starter homes have become harder to find amid rising home prices and mortgage rates. While new-home construction hit a 10-year high in 2017, these units have not translated into starter-home inventory just yet.”

Entry-level home prices have risen 9.6 percent since the first quarter of 2017, according to Trulia, and inventory in the segment shrunk 14.2 percent just in the first quarter of 2018. The average buyer would need 41.2 percent of their income to purchase a starter today.

“Builders are focusing on the more upper-middle or premium home segments—mostly because of returns on investments,” Young says. “Though builder sentiment is quite high, they have some headwinds around a shortage of labor. The focus now is trying to maximize their return, and, unfortunately, it’s not at the bottom of the market.”

In general, inventory has risen 3.3 percent, but is being driven mostly by the premium segment, which added 13.3 percent supply year-over-year. Breaking down the data:

In addition to affordability constraints, the condition of entry-level homes is fading. Compared to entry-level homes in 2012, the average entry-level home is nine years older, and more are becoming classified as fixers—an 11.2 percent share today, versus a 10.3 percent share in 2012. Moreover, entry-level homes have 2 percent less square feet (down to 1,187 square feet from 1,211 square feet). Why?

“What’s actually out there is getting tighter, and what may have been on the cusp of the starter/trade-up is now trade-up—everything is starting to spread,” says Young. “What’s filtering down in the starter home market now is the smallest, oldest, lower-quality homes.”

For more information, please visit www.trulia.com. Suzanne De Vita is RISMedia’s online news editor. Email her your real estate news ideas at sdevita@rismedia.com. Reprinted with permission from RISMedia. ©2018. All rights reserved.