7 Reasons for Michigan's Housing Inventory Shortage in 2018

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There is no doubt we’re right in the middle of a housing shortage in Michigan, and across the nation. And, as we know from the classic “supply and demand” axiom, less supply and greater demand pushes up prices for real estate. The housing inventory level is at the point now where even sellers who are willing and able to sell their homes are reluctant to do so because they’re not sure where they’re going to buy.

Though strong demand for housing allows sellers to command a higher asking price for their home, this also creates challenges for buying a new home. This leads many homesellers and homebuyers to ask, “Why are there so few homes to buy?” This is a complex problem and the reasons are equally complex. Here are 7 reasons why Michigan’s housing inventory is so low in 2018.

7 Reasons Michigan’s Housing Inventory is So Low in 2018

1. The Crash

iStock_000022200278LargeAn obvious answer to the housing crunch is that no new homes are being built, which means available inventory is limited to existing housing. But why are no new homes being built?

The housing collapse around 2008 can be seen as the start of the current housing shortage. Before the Great Recession, liberal lending guidelines meant almost anyone could get financing to buy a home, and demand was high. Contractors built homes aggressively to keep up with demand. This created a period of over-building, where homes went up faster than new families formed.

After the crash, demand for homes plummeted along with housing prices, and the many homes from the over-building period were left over. Earlier, in 2005, there were 1.5 million new homes built, but that figure fell by more than half in years following. Since home prices were low and many homes were still vacant on the market, home builders couldn’t make a case for construction for many years. As the economy rebounded, so did demand, but no new homes were built due, in part, to the leftover supply from the overbuilding period. Today, we’re seeing 1 million new home starts, but demand has increased faster than home builders can return to the market and finance and build new homes. 

2. Financing Timeline

From a developer’s perspective, getting approved for the millions of dollars it takes to start and complete a brand new subdivision can be a long one. Remember, banks too were caught up in the crash and were very reluctant to approve funding for any new projects. While banks today are more open to the idea of financing a new development as demand for housing has increased and the local economy has stabilized and growing, it takes time to get the various approvals needed before final funds can be released. This longer financing timeline also contributes to the current housing inventory shortage in Michigan and across the nation.

3. Development Timeline

The timeline from permits to breaking ground is also a long one. Developers who survived the crash were reluctant to start new developments until they were convinced the economy was on the mend. Michigan’s economy, as well as across the nation, has been extremely strong, but builders must first go through the financing and development timeline before they can add new homes to the market. During this time, demand increases but supply remains the same, creating the housing inventory shortage. 

4. Are There Better Places to Build?

iStock_000011690187MediumWhen demand is high, builders want to leverage their resources as much as possible and begin new projects. But demand is different in different areas, so deciding where to build can vary. If the timeline is simply too long to start a new development or the demand isn’t strong enough to justify breaking new ground, developers will choose other areas. Many builders target urban metro areas like greater Detroit and Chicago, where higher population density creates higher demand and higher payoffs, especially in the most wealthy suburbs. This drives developers to move to high profit areas, creating greater, longer housing shortages in other areas. 

5. First Timer Dilemma

First-time home buyers are increasingly being shut out of the market due to the higher prices existing homes are commanding. Properties listed at $200,000 or less are increasingly hard to find. Starter homes 10 years ago were readily available, but tightened lending guidelines in response to the toxic housing debt crisis have made it more difficult for first-time buyers in particular.

Other issues have exacerbated the housing inventory shortage particularly for first-time homebuyers. Seeing the high demand for starter homes, many move-up buyers are deciding to rent out their first home instead of selling in order to make their second home purchase easier. Builders also have a smaller incentive to build starter homes, since $200,000 or greater homes provide higher profit margins. 

6. Labor Issues

Low unemployment rates are a good thing. It’s an indication the economy is on a roll, people are employed and bringing home paychecks. More money in the economy fuels consumer spending, which then leads to even more economic activity. On the flip side, a low unemployment rate also means a labor shortage, particularly in construction. The Great Recession hit housing especially hard and many contractors left the industry permanently. Other new contractors that may have entered the industry during that time opted for more stable careers. This means experienced workers are much harder to find in construction, adding yet another complication to the housing inventory shortage.

7. Speculation

Real estate investors have certainly taken advantage of the housing surplus for years. The investors mantra is always “buy low, sell high” and that’s another factor in the real estate market. Many investors bought up properties at low prices during the crash and turned them into businesses or rental units. As demand has increased, the profit forecasts for property development are better for many investors, making it easier to justify financing and development, especially for investors with lots of initial start-up money. Ultimately, this real estate speculation adds another factor to the housing inventory shortage in Michigan.

Demand for housing is a good thing, but the housing inventory shortage in Michigan is a challenge. Builders have begun to alleviate this shortage through new home constructions. When you build your own home, you don’t have to worry about the housing inventory shortage and you don't have to compromise on the features you want. 

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