The secret to unlocking starter-home inventory

What’s the number-one challenge in U.S. housing today? Many might say it’s our record-low home inventory. Consecutive months of inventory shortage have been the culprit of inflated home prices, overvalued markets, risky buying behaviors, e.g., waiving home inspections and signing contract sight unseen, and subdued sales volume. A balanced housing market typically carries six-month supply of home inventory; Seattle has 0.6-month supply worth of homes listed for sale. 

Some experts have theorized that recent years of record-low mortgage rates contributed to reluctance to sell, as homeowners do not want to give up their newly refinanced low mortgages. This is certainly a factor, yet might not be as influential as previously assumed. ValueInsured found in its Modern Homebuyer Survey that only 18% of interested, but hesitant, sellers point to their low mortgage payment as a key reason they are putting off selling. On the other hand, 57% say they are not selling because they are concerned with buying high in today’s low-inventory, inflated market. Chicken, meet egg.

Upon closer examination of home inventory at all price points, CoreLogic found the most severe drought happens at the starter-home level. This finding was echoed by an insightful report published by Trulia. The latest ValueInsured quarterly survey yields consistent findings. In Q1 2018, 70% of all Millennial homeowners who are considering selling soon say they are waiting until prices to buy are better before making a move; this represents an 18 percentage point surplus compared to 52% of interested home sellers ages 35+ who say the same.

Secret to unlocking inventory

  • Among all Millennial homeowners, 76% say now is a good time to sell a home, according to findings from ValueInsured’s latest survey.
  • In contrast, among the same group, only 58% say now is a good time to buy a home. This represents an 18-percentage points differential between Millennial homeowners’ sentiments toward selling vs. buying.
  • Among Millennial homeowners who are considering selling soon, 68% of them say they are trying to time the market, and are worried about “buying too high”.
  • Another 68% also say they are worried about “losing flexibility” if they sell now and upgrade to a bigger/more expensive home.

ValueInsured’s findings on Millennial homeowners are consistent across multi-dimensional measures, indicating many owners of starter home tend to be interested in selling in order to upgrade, but most are not pulling the trigger as they are concerned with what they would have to pay for the next home. Some may wonder if sellers could sell high for a generous profit, why would they care if they would have to buy a little higher too. The answer is simple: 73% of all Millennial homeowners believe people who buy in their neighborhood now would be overpaying; if a starter-home owner believes he or she could sell their $250,000 home for 10% over market value, after brokers’ commissions, closing costs, legal fees and capital gains tax, there may not be much left to pay 10% over market value on a desirable, more expensive home they would want to upgrade to in their own neighborhood. Most potential upgrade buyers likely need to plan for a substantially higher home price, a larger than their currently owned home loan, and more expensive monthly mortgage payment in order to afford that extra 1-2 bedrooms.

Such an enormous undertaking correlates with a recent report that 34% of homeowners regret not buying a bigger home in the first place. More homeowners now prefer to update their existing home through renovation and home improvement projects instead of selling, often citing the high costs of selling and buying as a top reason.

Given the high costs of upgrading, and the higher stakes – when 73% of Millennial homeowners believe buying in their neighborhood now could mean overpaying – it is no wonder starter-home owners are holding on to their home even if they feel they have outgrown it. But think of what could happen to this historic housing crunch when 80% say they would sell and upgrade sooner if they could have more confidence they would not lose money on the next home they buy. Starter-home owners know just because they can sell high now doesn’t mean they couldn’t get caught in a down cycle when they need to sell their next, more expensive home later. The solution to unlocking starter-home inventory could very well depend on giving homeowners more confidence and a safety net they so desperately need to transition to their next home.