Since my divorce, I’ve been on the lookout for a budget-friendly home. I don’t require anything extravagant or brand new; I simply need enough space for myself and my three kids. A three-bedroom house with at least one and a half bathrooms would be ideal because, let’s face it, when one child needs to use the restroom, it feels like they all do at once. Unfortunately, locating this dream home at a reasonable price has proven to be an uphill battle. There’s a significant shortage of affordable homes, and many of us are grappling with the same issue.
The pandemic has brought the already tumultuous housing market into sharper focus, but the issue of dwindling inventory began drawing attention as early as 2018, according to mortgage lender Freddie Mac. In fact, the decline in available homes has been ongoing since the 1980s. Back then, about 40% of new constructions were entry-level homes—typically around 1,400 square feet with two to three bedrooms. Fast forward to 2020, and that figure plummeted to just 7%. In the next decade, approximately 45 million Americans will reach the median age for first-time homebuyers (between 34 and 44), joining the 41.8 million individuals still searching for their ideal starter home.
Currently, the market is facing a shortage of 4 million homes to meet the demand, and unless there is a significant shift in new construction, this gap will only widen.
Reasons Behind the Shortage
The pandemic has underscored the ongoing labor shortages plaguing the construction industry. According to a survey by the Associated General Contractors of America, 81% of construction firms reported struggling to find skilled workers. Builders are also contending with stricter land use regulations, a lack of available land in desirable areas, rising land values for single-family homes, and escalating costs for building materials.
During the pandemic, the price of lumber surged by over 150%, coupled with longer wait times for essential supplies. While conditions are improving, it’s still not cost-effective for builders to create entry-level homes, particularly when the expenses surpass what first-time buyers can afford.
The discrepancy between supply and demand is stark. The Federal Housing Agency reports that the median price per acre of land for single-family homes increased from $159,800 in 2012 to $203,200 in 2017. Builders must recoup land costs while also covering the price of construction materials, and unfortunately, buyers are feeling the brunt of these rising costs.
Low mortgage rates are also enticing more buyers into the market. This means purchasing power has remained robust even as home prices soar. Financing a new home is currently inexpensive—if you can manage the down payment and outbid others. This influx of buyers is exacerbating the already competitive housing market. Many have realized that a home office is now a necessity, resulting in increased demand for more spacious living situations.
As a result, home sales have risen, but inventory levels remain far below what is required. The fundamental law of supply and demand is pushing home prices beyond reasonable limits, leading to bidding wars and buyers waiving inspections to secure their desired properties. Over the past year, I’ve heard countless stories of people losing out on homes simply because someone else could afford to pay in cash. That someone isn’t me.
Is There Hope?
In my area, while home prices are gradually decreasing, inventory remains low, and available options are often beyond my needs and budget. I’m striving to remain patient, but hard work and persistence can only take me so far. I’m collaborating with a community land trust that assists individuals in acquiring entry-level homes. While the initiative is commendable, I haven’t encountered a suitable property in the nine months since I joined. Some reports suggest that inventory may improve towards the end of 2021 and into 2022, but timing and luck will also play crucial roles in my search.
Lawrence Yu, chief economist for the National Association of Realtors, anticipates that more homes will become available as COVID-19 vaccinations increase and potential sellers feel more comfortable listing their properties. The reduction in homeowners in mortgage forbearance could also contribute to a rise in inventory.
However, true relief for many of us will come in the form of new, affordable housing, which is still years away. The demand for entry-level homes is expected to remain high for the foreseeable future.
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Summary
The search for entry-level homes has become increasingly difficult for first-time buyers, exacerbated by a housing market that lacks affordable options. As demand surges and supply dwindles, those seeking budget-friendly properties face intense competition and rising prices. While some hope exists for future inventory increases, the challenge remains significant for many aspiring homeowners.
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