Where have all the homesellers gone?

Q: John, what’s this all about?

A: Tight inventory has been an important feature of the housing market at least since 2016, according to a recent study by Freddie Mac in its publication Outlook. The government-sponsored lender also noted that for-sale housing inventory, especially of starter homes, is currently at its lowest level in over 10 years.

Why does it matter to the rest of us?

The answer is relatively simple: a long-term slowing of sales of starter homes has an impact far beyond the loss of that one sale.

In most cases, the seller of that starter home plans to buy a larger and more expensive home, and the seller of that home plans to do the same thing.

Once the starter home market is crippled, it has a domino effect on the entire residential real estate market.

And the shortage is acute.

In metro Atlanta, a starter home buyer could traditionally buy a nice entry level home in new or very nice condition for $125,000 to $150,000.

Today, there is almost nothing in that price range, new or used, that is in “move-in” condition.

Twenty years ago, a first time buyer would simply buy a fixer-upper, improving the house at night and on weekends.

Today, lenders are very strict about condition. If the home is not in move-in condition, the loan will not be approved. That is why investors use cash-only transactions and command steep price concessions.

But there are other causes for the shortage:

1. The trend for the past year and a half has been toward higher inflation, leading to higher mortgage rates and higher home prices.

To make things worse, the Federal Reserve is determined to keep inflation under control by raising interest rates. In fact, its leaders have said so publicly. So interest rates are, in fact, heading up.

2. Homeowners are hunkered down.

They may fear that they won’t like what they find in their price range so they are just staying put. Or they may worry that they’ll lose the much lower interest rate on their current home if they sell, so they just sit tight.

3. Gen X-ers (ages 34-54) are finally emerging from the recession and ready to become homeowners.

This is the generation that was hurt most by the Great Recession, and they’re finally in their prime earning years, making enough money to buy a starter home. That makes the market even more competitive.

But it turns out that the primary reason for the shortage of starter homes may be conversion to rentals.

According to the U.S. Census Bureau, from 2006 to 2014, the number of single-family homes occupied by renters jumped by about 34 percent, a shift that had its beginnings in the subprime mortgage debacle.

After the crash, institutional and private investors jumped into the market void to buy undervalued and foreclosed homes, repair them and convert them to rentals. This activity was especially prevalent in metro Atlanta during the depths of the housing crash.

These same investors helped to stabilize prices, remove eyesore vacant homes from the market, and absorb a virtual flood of foreclosed homes.

But now it appears they have also contributed to the starter-home shortage that is slowing the return of first-time buyers to the housing market.

How this dilemma is resolved only time will tell. We’ll watch and report.

Atlanta native John Adams is a broker, broadcaster, and writer who owns and manages residential real estate in the Atlanta area. He answers any and all real estate questions on his award winning radio show every Sunday at 11 a.m. on WGKA 920am. You can contact John through his website at Money99.com, where you will find additional information on this topic, and a link to the complete study by FREDDIE MAC under the resources tab.