The Housing Inventory Crisis, Explained

Jay Vorhees at JVM Lending wrote a blog about the “Housing Inventory Crisis” recently, and I wanted to share a lightly edited version of it. Read on below:

Picture yourselves walking into your local Whole Foods and seeing 2/3 of the shelves entirely empty. That is exactly the state of the single-family residential real estate market today, according to Jason Hartman, a true expert when it comes to residential real estate.

aerial photography of rural

Mr. Hartman was recently on the Rebel Capitalist YouTube show making this point, while also discussing real estate in general and why he is still buying. There are currently only 380,000 homes for sale in the entire country, per Mr. Hartman, which is less than 1/3 of our normal inventory of 1.2 million homes.

This massive inventory shortage both drives up prices and makes it increasingly difficult to even find a home – as most of us in the real estate and mortgage industries know well. So, why is inventory so low?

Builders are not building. I have mentioned this many times in previous blogs, but builders are bringing some 500,000 fewer units to market each year than they were prior to the 2008 meltdown. Freddie Mac says that we are “underbuilt” by 3.8 million units right now – and there are many reasons for this.

Starter homes are not profitable. In Northern California, it costs a builder $170,000 on average to prep a single lot for buildings (for permits and regulatory compliance) which is considerably less than the $6,000 it takes in Tennessee. And, unfortunately, California is not alone. When you couple these costs along with all of the other environmental and safety regulations (low flow water; insulated windows; fire safety; etc.) and inflated material and labor costs, starter homes are nearly impossible to build at a profit.

Labor shortage. This is a more recent phenomenon that was fostered by COVID and government policy, but current labor shortages are significantly exacerbating supply problems.

Millennials getting old. The oldest millennial is now 41, amazingly. What this means is that the largest generation to surge through our economy ever is now hitting its highest earning potential and thus buying homes at the fastest pace ever (in contrast to 2008 when the homebuying demographic was at its lowest point). This is a major reason inventory is getting mopped up.

Investors galore. Mr. Hartman reminds us that “buy and hold” single-family real estate investing is a relatively recent phenomenon, as it largely did not exist prior to the 1950s. But now, both individual and institutional investors are buying and holding real estate at levels never before seen, as both groups chase inflation hedges as well as higher and safer investment yields.

man in black shirt sitting on chair near white wooden house during daytime

Buyers awash in cash. The video linked above also discusses the massive influx of cash into our economy, as there is currently $3.6 TRILLION sitting in checking accounts compared to only $1.2 TRILLION prior to the COVID crisis. When buyers have that much cash, they are more willing to bid aggressively and to just buy more homes in general.

This is what I found most encouraging when it comes to our mutual clients and their concerns about a bubble: Hartman, who knows more about residential real estate than any of us, is still buying like crazy; he has made 11 offers in the last two weeks alone.

Why? The millennial homebuying contingent will not peak until 2026, the inventory problem is not going away, and inflation! To repeat my inflation-hedge mantra: Housing is a hard asset and a natural inflation hedge; rents go up with inflation, making investment housing an even better hedge; and 3o-year mortgages are an “asset in an inflationary environment,” as I explain in this blog.

Kristin’s take: Coulda, woulda, shoulda. So many people sat back because, over a year ago, prices were too high. Now, they’re even higher. I also know many buyers that have been priced out of the Bay Area and have moved out of the area altogether. We also have an added issue: there is very little land to build on. It is usually tear-downs or flips, or you have to go farther out for new construction. As Jay notes above, a mortgage can be a fixed cost, something you know you’ll pay every month. When I bought my first house, I felt we were treading water to my upper lip. Within months, it all normalized. Sure. I could not go on the big vacation that year, but now, 21 years later, it was the best investment I have made. I can’t imagine where I would be if I had followed my divorce attorney’s advice not to buy out my ex-husband 12 years ago.

Why You’re Getting Unsolicited Offers On Your House

Recently, on BHG.com, there was an article I found both timely and interesting. It was about why you might be getting offers on your house, even when it’s not for sale. Personally, I get these calls all the time. All I have to say is, “I’m a realtor,” and most hang up on me. One asked if I have any coming off-market fixers.

Anyway, read on below and see what you think, and how you should handle these unsolicited offers if you do receive them. You can also read it at the link I posted in the opening paragraph.

gray wooden house

The housing market has been on fire since 2020, and experts are predicting that 2022 will continue to see high competition and low inventory. As a result, homeowners can expect to receive offers to purchase their house—whether or not it’s actually for sale. Although these offers often tout enticing perks, like quick cash payments, there’s usually one big drawback: they typically lowball the price. We asked real estate professionals across the country what you should do when you get an offer on your unlisted house.

Why am I receiving offers to buy my unlisted house?

“Unsolicited offers are quite literally offers to purchase your home without you listing it or even talking to a real estate agent about listing your home,” says Georgia-based realtor Tim Grant. These offers to buy unlisted property come in many forms, from mass-produced postcards and spam-y text messages and phone calls to hand-delivered flyers and knocks at the front door. Although it’s a standard real estate tactic, homeowners are experiencing it more due to the current housing market.

Most unsolicited offers come from investors (both large companies and individual people) looking for opportunities to make below-market purchases for resale profit. These investors use many strategies, such as targeting properties through public information like online real estate listing services and tax, mortgage, and foreclosure records, as well as sending out broad offers to every house in an area. “They do this because they need an asset to invest in, and there aren’t very many for sale right now,” says Katharine Davis, a realtor in Jacksonville, Florida. “Also, this type of marketing is easy. For every thousand or so contacts, they get 1-2 yeses,” she says.

“Now, with inventory so low, everyday home buyers and their agents are using the same playbook,” says Grant. These buyers are actually interested in occupying your house. They are seeking off-market sales to avoid bidding wars or secure a home in a sought-after neighborhood, school district, or otherwise desirable area that has low (or no) available inventory.

Evaluating the Offer

If the house is unlisted and the homeowner isn’t interested in selling, what makes an unsolicited offer appealing? It’s usually attention-grabbing promises of quick, large cash payments and a fast process. They might also offer to cover necessary property repairs or assume closing costs. But despite the immediate appeal, the offer should be critically considered. 

Regard initial details with skepticism—they’re not set in stone.

According to Gwyn Ice, a real estate agent practicing in Ponte Vedra Beach, Florida, the details of that initial offer are subject to change. For example, Ice says a property inspection is likely to drop the sale price and additional fees can impact the seller’s earnings. Plus, there’s financing to consider: price can take a hit if an appraisal finds the property to have a lower value than the initial offer—and even if it’s a cash offer, the money has to be there. Offers that promote closing in a certain number of days might also not be guaranteed.

trees beside white house

Consider the source of the offer.

Generally, these offers are legitimate and not scams to get money or property from the homeowner. However, it’s still important to look into the source of the offer. Tim Knuth, a Milwaukee-area broker, notes that some unsolicited offers come from unlicensed persons or entities rather than regulated real estate professionals. In some extreme cases, Knuth says entire parts of a real estate transaction can be left out of these interactions, such as skipping the title transfer. Dealings with these individuals might also be more vulnerable to theft via wire fraud and email scams if they use common, less secure methods for requesting and transferring funds.

On the other hand, offers from an individual (or real estate professionals acting on their behalf) typically align with a traditional on-market selling process. “These offers are usually prequalified,” says Eileen Lacerte, a broker in Kamuela, Hawaii. “In many cases, they are cash buyers or at least have a pre-qualification letter from a lender.” Lacerte also notes that these offers are more likely to meet fair market value for the property.

Take a hard look at the offer price.

For investor-driven offers, the offer price will be quite low. Their broad marketing approach means their offer likely isn’t property-specific, and their goal is to make a profit, so you can guarantee it will be lower than an on-market evaluation. “These types of buyers are relying on your limited knowledge of the current real estate market,” says Lexington, Kentucky, realtor Kim Soper. While most people are aware of the current housing market, they might not realize the impact it’s had on their property. “With home prices skyrocketing—sometimes over 20% in the last year—you may be surprised to learn that what looks like a really great offer may be pretty low,” says Davis.

Remember you’re moving.

Don’t forget that if you decide to sell your home, you still need a place to live. This might not be a concern for someone with a second property or family with space to spare for a while. But for many homeowners, it means arranging financing and entering the competitive housing or rental markets. Does the offer do enough to offset the time, energy, and incurred expenses?

Determine Your Priorities

For many people, the convenience of an off-market sale is highly attractive. “No prepping the house for sale, no showings, no strangers, no open houses, no failed contracts—you can even choose your closing date,” says Davis. A large sum of quick cash also has appeal, while others are interested in having a way out that won’t require renovations or necessary repairs to make the house marketable. But if getting the best price or recouping the value of the property is your priority, an off-market offer—especially one from an investor—is not the right route. “As a seller, if you were to accept one of these unsolicited offers, you are potentially missing out on tens of thousands of dollars and selling your home below its true value,” says Grant.

What should I do if I’m interested in an offer on my unlisted house?

“When someone makes an unsolicited offer on your house, you are in the position of strength,” says Davis. Knuth agrees. “Selling a house off-market can be a win-win for both the seller and the buyer—if the seller knows what they have,” he says. Real estate agents warn that homeowners are susceptible to being financially taken advantage of with an unsolicited offer. Examples include accepting a drastically under-market value, paying costs that could have been covered by the buyer, or through “wholesaling”—when a proposed buyer actually arranges for the property to be purchased by a totally different buyer at a higher price than what was negotiated with the seller, thus willfully undercutting the homeowner and pocketing the excess money for themself.

Homeowners considering an unsolicited offer fare better with a real estate professional on their side. “Sellers should seek some sort of professional advice before accepting an unsolicited offer,” says Lacerte. “Legal advice and a real estate market analysis will go a long way in avoiding regrets.” A pro can help identify an appropriate value for the property, as well as represent the homeowner’s interests by negotiating terms and price.

white wooden house near green trees during daytime

According to Soper, engaging a professional early not only lets them evaluate an unsolicited offer, but they can also help determine if selling is the right move for you at that time. She notes another benefit is having someone ready to help find your next home if you decide to sell. Knuth also recommends getting someone on your side before responding to the unsolicited offer, and he suggests letting them do all the liaising with the potential buyer. But even if you’ve already been communicating about an offer on your unlisted home, Knuth says it’s not too late to engage a professional. “If telling someone you’re bringing a realtor on board halts the process or they encourage you not to do it? That’s a big red flag,” says Knuth. In that case, you should be very wary of the offer and the buyer.

How to Turn Down an Unsolicited Offer

If you’re not interested, you don’t have to respond! This is especially true for impersonal pitches that come from large investors—though you might want to reach out if they offer an option to remove yourself from future communications. Knuth recommends the Do Not Call Registry is another way to cut back on unsolicited offers. If the offer comes from a local buyer or real estate agent, a reply is appreciated. “A polite, ‘Thank you, I’m not interested at this time’ usually is the response,” says Lacerte.

A closing in Walnut Creek!

I recently closed on a home at 536 Coralie Dr. in Walnut Creek. My clients, Kim and Adam (I have known Kim since the 90s!), had been living in a small flat in San Francisco for many years. But their last child recently went to college, and they decided the East Bay would be a nice place to live – and more affordable than the city.

We met this summer over lunch and talked about what they were looking for. They worked on their approval, we tinkered with their search criteria, and then started to look at homes. They fell in love with one right out of the gate, which had been on the market only a couple of days. When I called the listing agent to get additional information, I was informed they had just accepted a preemptive offer. 

A few weeks later, we looked at another set of houses and they decided to write. There were 7 offers. We went above the list price, and they decided to remove all contingencies. Three offers were countered: only those who removed contingencies and all above asking. So, the sellers did not counter price. I inquired with the agent if we were the highest and he said no. 

These clients were the fastest learners of how to compete in a crazy market. They decided to go all-in, gave them a couple of weeks of rent back, and won the house. They are so excited to have fruit trees, a backyard with extra space, and a cook’s kitchen. Sometimes dreams do come true!

No Surprise Here!

The National Association of Realtors (NAR) conducted an annual survey to create a profile of home buyers and sellers. It helps define the trends of the past year and look forward to those of the next. I want to share some of their key findings:

Homes typically sold at a record pace of one week and received full asking price from July 2020-June 2021.

Kristin’s take: That has been the theme in Contra Costa County all year. Right now, condos/townhomes (those with HOAs) are not as robust and might provide an opportunity not to compete. Or, if it has been sitting for more than 20 days, you might get it at a lower price. I believe that will change at the beginning of the year, as it did this year.

Tenure in the home dropped from 10 years to 8 years, the largest year-over-year decline in the history of the data set (40 years).

Kristin’s take: It used to be seven years was the average time in a home. That changed with the meltdown and now it’s dropped again, primarily from the pandemic. The ability to work from home allowed people to move, whether it is out of state or to a bigger space.

Among repeat home buyers and home sellers over the last year, a key factor for moving was the desire to live closer to family and friends, while an equally important motivator was the need for more space or a bigger home.

Twenty-eight percent of first-time buyers reported that they used a gift or a loan from friends or family in order to make a down payment on a home and 29% said saving for a down payment proved to be the most difficult step in the entire buying process. For repeat buyers, 56% cited using equity generated from the sale of a primary residence toward their down payment. For first-time buyers, the typical down payment was 7%, while it was 17% among repeat buyers.

Kristin’s take: This is how first-time homebuyers are getting into homes. I have seen family members gift $300k for the down payment and pay for closing costs.

Forty-seven percent of buyers said the agent they used was referred by a friend, neighbor, or relative, and 13% used an agent that they had already worked with on a past transaction. Seventy-three percent of buyers reported that they needed to interview only one real estate agent during their home search, and a whopping 90% said they would use their agent in the future or recommend the agent to others.

Kristin’s take: It all comes down to trust and how good of a job the agent does communicating, managing expectations, and explanation of the market. It can take some time to get an offer accepted and it is a process buyers have to experience and learn from. For selling a home, the key is to price it correctly, as buyers are paying over list, but if it is listed where you think it might sell, buyers are expecting to offer more, and then it may sit.

Rates Have Never Been This High!*

*since 2021…

My friend Jay Vorhees at JVM Lending recently wrote about this, and I wanted to share a couple graphs he included in the blog to give context to the “rising” interest rates.

As Jay mentions in his blog, there is perspective to be considered when discussing the rising interest rates. They HAVE risen (1/4% – 3/8%) since last summer, but did you know they are actually lower now than they were on April 1st of this year?

Or that they remain lower than they have been for most of the last 10 years? And significantly lower than where they were for most of the last 45 years? As Jay puts it at the end of his blog, today’s rates remain a gift!

Here are those graphs for context (first, mortgage rates over the last 10 years, followed by rates going back to 1971):

So, if you are on the fence about purchasing, rates are still very low and we are only just starting to experience some inflation. You will lose more purchasing power with rates going up (which usually occurs when inflation comes around) than with prices going up.

I have not had any recent issues with appraisals. I just had a buyer increase the offer price by more than $100k over the list price and the appraisal came in. Who knows what the future will hold, but overall it is still a good time to purchase.

Another Buyer Closing!

I recently represented a buyer for a home in the Antioch area. It was a 4-bedroom fixer listed at $575,000, but my client got it for $540,000. The picture below shows what the house looked like when my client put the offer in. He has since landscaped the front.

This was a trust sale, and the renter had been there for years with low rent and would fix some things for the previous executor who was ousted out by a relative via a court battle. I was told he was spending all the trust money. After we did our inspections, we found it needed a new HVAC system, the tenant who was an electrician replaced a part to keep it running for $400, saving the previous executor (however, that was a few years ago and it should have a completely new system). The home also needed fresh paint, new flooring, and some updating. You can see a glimpse of the work my client has done in the yard so far here.

The neighbors are happy and my client is slowly getting the work done, which will give him some sweat equity. If you know of any fixers, give me a call! I have a bunch of contractors looking for opportunities.

Understanding California SB9

I received an email from Chicago Title recently about California Senate Bill #9 (SB9), which was signed into law in mid-September and takes effect on the first day of 2022. The language of the bill means that up to four homes on parcels where one currently exists may be allowed (by allowing current single-family homes to be converted into duplexes or be subdivided into lots).

Here’s why this matters: it will allow more homes or ADUs to be built on larger lots with the hopes of curbing our housing shortage. The con is that the neighborhoods with large lots will become denser. I find when people are moving into a single-family home, often having a decent-sized yard is a priority, where kids can play, dogs can romp, and BBQs can be held on the patio. I foresee large lot homes will be coveted and hold value, as new construction usually has small lots and SB9 will change the landscape of many existing homes with large lots.

We could see a lot more homes being built on existing plots, except for those types of plots that are exempt. This could lead to more movement of current homeowners, more rentals, and a higher population, among other things. For realtors, it’s a boon. For those who think the Bay Area is crowded, it might not be so welcome!

What do you think about SB9? Are you opposed or in favor? Let me know why in the comments!

Another Closing!

I recently closed on a property (3320 Northwood K, Concord) in a very unique situation: I represented both the seller and the buyer. I do this rarely, but it worked out in this instance and both sides ended up very happy!

The sellers, Chahera and Hakim, have four kids in a two-bedroom home. To go to market, they would have had to paint and replace the carpet upstairs. It was a big ask! But, I had a buyer, Tina, who had been looking for a two-bedroom townhome in Concord and had been beaten out multiple times.

She offered Chahera and Hakim fair market value, taking into consideration the painting and carpet needs. The kitchen and downstairs half-bath had been recently remodeled. The pictures below are of the house as Tina begins to add her own touches of paint, carpet a bit of wallpaper.

Recent sales were around $420,000 and $430,000 and Tina and I had put an offer on the $420,000 property at $424,000 and they still chose the other buyer. So, needless to say, this was a perfect situation for both sides that left both buyers and sellers satisfied! Congratulations to both families.

Football Season And Real Estate

In my experience, once football season begins, we often see wives coming to Open Houses alone. Husbands seem to stay home and watch the games, especially if the 49ers or Raiders have a 1:00 p.m. time slot – right when most Open Houses are in session!

Traditionally, the spring home-buying season here in California kicks off the weekend after the Super Bowl; however, with the pandemic, most traditional timelines regarding real estate have been shattered. The past couple of years, buyers have been out in droves the weekend after New Year’s. But, again, you will often see a single woman out looking while hubby is on the couch glued to the TV.

It’s not a guarantee, but it seems to happen a lot more often than not during football season. Funny the effect a sporting event can have on something life-changing like the purchase of a new home! Here are some fun facts about football, from, of all places, an email I received from CUTCO:

Did you know that football was still relatively new in 1892? It stemmed from two sports – soccer and rugby. It wasn’t until a Yale undergraduate and medical student, Walter Camp, also known as the “Father of American Football,” decided to change the rules, creating a sport that would be cherished by millions.

A Closing On Kirkwood!

You may remember that I had recently listed a 2-bed, 2-bath condo in Kirkwood Knolls in Concord. It was a spacious and serene space listed at $500,000 and about 1,250 square feet. Well…good news!

I’m happy to report that my clients have closed! You can see the original listing information! Here is the couple on moving day in front of their home, ready for the next chapter.

My very happy clients received three offers and we closed at $550,000. They are waiting for a new house to be built out of the area and are off traveling the world – a new norm with the ability to work from home. Congratulations and wishes of happiness on their new adventures.