How the RE Buyer Seller Imbalance Affects Note Buying
According to…well, everyone in the housing market, if you want to sell a house, the time is now.
Competition for homes is heating up, with Forbes reporting only a 2.5 month supply of homes currently on the market. Houses in some areas are going under contract in only 7 days, and 26% are going above list price.
This sounds great if you’re a home seller, but what does it mean for note buyers and note sellers?
Let’s take a look at the housing market imbalance, what’s causing it, and what it means for the mortgage buying industry.
What’s With the Market Imbalance?
The market is currently flooded with buyers, but starving for inventory.
There simply aren’t enough homes being sold at the moment to keep up with demand.
In a “balanced” market, the number of buyers and sellers is more or less equal, and there is about a six month supply of homes on the market.
At the moment, the market is skewing so far toward sellers that houses are going under contract in an average of only 29 days, the lowest since the National Association of Realtors began tracking the data six years ago.
The problem then becomes self-perpetuating. As competition becomes more fierce, houses are snapped up faster, there are no sellers replacing homes on the market, supply dwindles, rinse and repeat.
In addition to a simple lack of people selling their homes, house builders are slowing their new construction. Home builder confidence has been in decline for eight months, hitting its lowest in June.
All that added together makes for a market more imbalanced than we’ve seen in years, even in the years leading up to the housing crisis.
Why the Imbalance?
For many years, especially after the 2008 crash, the number of potential buyers hit historic lows as foreclosures and short-sales flooded the housing market. At that time, sellers couldn’t get rid of their homes, even selling far below value. It was a great time for investors looking to purchase investment property, but sellers took a huge hit.
Even as the economy improved, the young adult generation, usually a group counted on to buy homes as they begin their adult lives, remained shackled by stagnant wages and the consequences of an inherited economic nightmare. Buying a home simply wasn’t on their horizon.
This seems to be changing, however. While the old joke is that millennials are killing all the industries, from housing to diamonds, 45% of new home loans at the beginning of this year were for millenials.
Unfortunately, while they and other buyers are flooding the market, they are widely a generation of renters. The vast majority of home buyers are not selling a home in order to upgrade, which cripples the supply and demand dynamic.
This means that starter homes in particular are being snapped up as quickly as they hit the market, leaving many buyers out in the cold and desperate to catch a break.
What Does this Mean for Note Buyers and Note Sellers?
For note sellers and those looking to seller finance a property, this is an interesting situation. Fewer houses sold means fewer mortgage notes for note buyers to purchase.
And while this is all still speculative, it could put note sellers into a profitable position when it comes to selling mortgage notes.
For those looking to seller finance property, this imbalance in the market brings even more questions.
On the one hand, you should have little to no trouble selling traditionally if you wish, so why bother with seller financing at all?
On the other hand, the imbalance gives you a great deal of power. Buyers are scrambling for homes that are in short supply, and you may be able to put together a more profitable deal than you would with traditional selling. Buyers are desperate to purchase, and that is something that could be used to your advantage.
It also gives you the opportunity.
As for note buyers, while this imbalance will eventually level out, the effects may be felt further down the line. If and when note sellers look to off-load these mortgages in the future, buyers may find a shortage of notes to buy, driving up prices.
We may see echoes of the current market, but with mortgage buyers in the place of home buyers. Again, all this is speculative, and we wouldn’t see this come to fruition for some time.
So What Now?
This market imbalance isn’t like much else we’ve seen before, so keep a close eye on the market.
This imbalance may lead some to worry over another economic crisis, but there doesn’t seem to be as much a danger as it was in the early 2000’s. Many safeguards are in place that were not at that time, so it is unlikely we will see the same kind of market crash.
The more likely result is that, given a few years, assuming the economy continues in it’s steady upward tick, the market will level itself out, especially as current buyers outgrow their starter homes and ready for a second round of home buying.
For note buyers and sellers, we may feel the reverberations of this a few years down the road, but note sellers and those looking to seller finance should take a look at how the current situation could benefit them and consider if seller financing or selling a note could be a financial windfall just now.