How to Overcome the Inventory Crisis

Before we jump into how to overcome where we are in real estate as agents, we need to understand some basic economic principles and how that affects us today.

Four Real Estate Cycles

Let’s start with the four real estate cycles and what they are.

The first is recovery. This is a tricky phase to identify as this phase takes place after a recession and most people are so burnt out on the effects of the recession to even see recovery on the horizon. This is the best time to buy real estate on the onset. We saw this around 2011-2013.

The second phase is expansion. This is where the general economy is improving, job growth is strong and there is an increased demand for space and housing. The expansion phase is when the general public will start regaining their confidence in the economy. This market is where renters and homebuyers will start generating demand again. While the market is on an upswing, it’s advantageous to invest your efforts into developing or redeveloping properties that cater to the current market’s taste and sell for more than market value.

Then we move into hyper supply as the third phase. This is where developers and investors get into a frenzy during the expansion phase to ensure that supply meets a growing demand. Eventually it hits a tipping point where supply begins to exceed demand, either from too much inventory on the market or because of a sudden shift in the economy or worldwide that causes fear and stops the demand. This is a great time to us the buy and hold strategy so that you have properties in stock when it’s an ideal time to sell again.

The fourth phase is recession. This is one that we’re all too familiar with whether or not you were in real estate during this time. The market crashing in the 2000’s was a combination of the perfect storm, which left the entire nation struggling for many years following. In the case of the 2000’s, subprime loans, an oversupply of inventory, inflated prices and lots of fraud and greed. If you want to understand it in more detail, check out the movie The Big Short. Typically during this phase, supply exceeds demand by a large margin and property owners see high vacancy rates in their rentals. This is a great opportunity to purchase distressed properties and wait until the market recovers to sell.

These four cycles typically represent a 7 year period where the market corrects itself.

However, since the recession in 2008, we have not seen this.

We saw the recession from 2008-2010 where there was a significant number of foreclosures, short sales and vacancies. Then from 2011-2013 we saw recovery and prices steadily increase. We saw expansion start around 2014 and continue through 2019 which is quite a long period for this phase but then we saw hyper supply hit in 2020 during the pandemic. It’s been going for almost two years straight with the largest equity and price increase seen from 2021 until now.

Homeowners have averaged a $67K gain in equity just during the pandemic ($300K in San Francisco, but that’s not our market so we don’t need to talk about that ridiculousness). People have seen higher ROI’s in buying and selling during the pandemic than in any other possible investment.

We haven’t seen a correction.

So people naturally think, there’s going to be another bubble popping. I agree that something has to give but let’s look at facts and…

Why this isn’t a bubble like 2008:

1. Low inventory
2. Cash – higher downpayments and paying appraisal gaps or removing appraisal contingencies
3. Tight restrictions on lending

Just when I think we may have experienced a slow down, 2020 happened and working remotely changed everything. Feeling “mishoused” became a real thing. This is when people had the right house until the pandemic happened and then everything felt too close for comfort so they no longer “fit” in their homes. Working environments at home and schooling from home made homes feel very tight and people wanted more space. We saw so many “move-up’ buyers that were looking for more space. Pool sales and installs and outdoor activities and remodels skyrocketed. People had to figure out what to do with their space while they were stuck at home and make it comfortable. If they couldn’t afford to move, then they were remodeling.

Florida saw a massive increase in relocations from other states, especially New York (which is typical for retirees but now we were seeing younger and younger families moving from NY earlier than normal) and California. In droves they were moving to Florida. I’ve heard it said and have experienced this in Orlando, but Florida is the new California – I hate that reference but we have the beaches, great weather, low taxes, incentives for small business, and freedoms that many other states do not and did not see during the pandemic that caused a huge exodus from states into ours.

This didn’t help our already low inventory crisis. I remember complaining about low inventory in 2011 and it has only continued decreasing monthly.

What a healthy market can sustain:

Months’ supply refers to the number of months it would take for the current inventory of homes on the market to sell given the current sales pace. Historically, six months of supply is associated with moderate price appreciation, and a lower level of months’ supply tends to push prices up more rapidly.

A healthy real estate market is a 6 month supply.

Where are we right now: According to the Florida Realtors monthly stats, we are at a 1.0-months’ supply while condo-townhouse inventory was at a 1.2-months’ supply.

Why has it not corrected itself? For the same reason this isn’t a bubble. We don’t have sufficient inventory for all those looking to relocate, stop renting or selling to buy a home.

According to Fortune:
Why is the inventory situation getting worse? It starts with demand, which isn’t letting up. We’re still amid the five-year window (between 2019 and 2023) when every millennial born in the generation’s five largest birth years (between 1989 and 1993) will hit the all-important first-time homebuying age of 30. Homebuilders, who cut back on building after the 2008 financial crisis, simply weren’t ready for this demographic wave that was looming even before the pandemic struck. To make matters worse, homebuilders are now struggling to even fulfill contracts on time as the overwhelmed global supply chain continues to create delays and shortages for everything from garage doors and windows to framing lumber.

There’s another reason inventory is shrinking again: Spiking mortgage rates. Back in December, the average 30-year fixed mortgage rate was at 3.11%. As of Friday, that rate has spiked to 3.85%. In theory, higher rates should cool the market over time. However, this sudden move up in mortgage rates, Bachman says, has corresponded in a short-term uptick in “buyer urgency.” Home shoppers, she says, are rushing to buy now before rates go even higher. Of course, that’s only taking more inventory off the market.

When can we anticipate a correction?

When it will correct – 3-5 catching up with housing and construction. Then we’ll see the inventory finally level to where the expansion phase is and will catch up with the housing shortage. Shortly after that is when I think we should see a balanced market.

Additionally, keep an eye out for interest rates rising and how that affects your buyers from purchasing a home. It will only become more costly over time.

Now what?

So what do you need to do now to make sure you still have a real estate career by the end of this year during this inventory shortage never seen before?

I have 4 simple but career changing ways:

1. This market is aggressive. We need to know what opportunities are available for our buyers. We have rent-to-own programs that we utilize as well as cash offers to help get our buyers the homes they want and compete against cash as cash because we all know FHA and VA don’t stand a chance but conventional

2. Work for your buyers (we know those are in abundance compared to sellers) by finding sellers. Be creative. We’ve contacted Expireds, FSBO’s and sent letters to homeowners of homes that match what our buyers are looking for. Door knocking. For sellers, eXp offers several programs that help set us apart from the rest in terms of listing presentations (Curbio, Express Offers, America’s Home Warranty)

3. Be the real estate expert in your market. Miami/Orlando is huge. You have to make sure you’re not trying to compete with everyone, you want to create a niche and expertise that people will find you. Mayor of your town.

4. Partner with a team or network that will train you on how to submit competitive offers and WIN! (discuss our weekly huddles) Getting ideas and discussing best practices – what has worked, what hasn’t. Feed off the energy and gain training to propel you through the next week
Joining eXp has given us access to tools and trainings we would otherwise have to pay thousands for. Here, it’s part of the culture. It’s what we do for one another since it’s an agent owned brokerage.
– Luxury caravan
– Team Building Mastery training
– Weekly accountability
– Referral system
– Support