Here's What Happens When Housing Inventory Is Low

It normally takes a four- to six-month supply of available homes to create an equalized housing market -- meaning one that doesn't favor buyers over sellers or vice versa. But as of the end of May, there was only a three-month supply of homes available, according to the National Association of Realtors.

To put it another way, housing inventory is currently very low. And that means that buyers have a clear advantage over sellers in today's housing market.

When there's not enough supply to go around

The basic laws of supply and demand tell us that when any given commodity is in short supply, its price is apt to rise. Just take a look at the auto industry. Car production slowed tremendously during the pandemic due in part to chip shortages, and that's driven vehicle prices upward in a meaningful way.

Similarly, there's been a glaring lack of housing inventory for a good number of years now. And that, in turn, is making things tough for home buyers.

Why is housing supply so limited? At this point, it's most likely a matter of costlier mortgage loans.

Many mortgage borrowers locked in ultra-low rates in 2020 and 2021, and since then, rates have climbed substantially. So anyone selling a home today and buying a new one is likely looking at giving up a relatively low mortgage rate and replacing it with a much higher one. That's not ideal, so a lot of homeowners are opting to stay put until borrowing rates come down.

A good situation for sellers, but not for buyers

Low housing inventory means that buyers have to duke it out with one another when quality homes hit the market. That's been leading to bidding wars that have driven home prices upward.

Clearly, higher home prices are what sellers want. But buyers, not so much.

Also, because there's not a lot of real estate inventory to choose from, sellers today don't have to make as much of an effort to make their homes presentable as they once did. Buyers are apt to be more willing to overlook certain flaws at a time when their choices are extremely limited.

But it's not just low inventory that is forcing buyers to pay more for homes. It's also that buyers are being forced to compromise on the features they're looking for since there's not a lot of selection. That, too, is problematic, since a home is, or should be, a longer-term commitment.

All told, a housing market with low inventory can work to sellers' advantage. But from a buyer's standpoint, it can be an extremely frustrating thing to navigate.

If mortgage rates start to fall, housing inventory could pick up nicely. But we may be a long way off from seeing that happen.

That said, if today's higher mortgage rates hold steady to the point where they become the norm, sellers are apt to adjust to that eventually. So even if borrowing rates don't come down, housing inventory should pick up gradually. It's really just a matter of when.