If you following the housing market there is one message that seems to come up time and time again, home sales continue to be held back by low inventory levels. While this message seems to be everywhere, no one seems to know why. In this article I will try and explain some of the reasons for these continued low levels.

Low Interest Rates

While low interest rates may seem great for homebuyers, they do introduce both a short term and long term problem.

After the last recession, in order to spur growth in both the economy and the housing market interest rates were cut to low levels. This created record low mortgage rates for an extended period of time and an ideal market for homebuyers. Over the last few years anybody who could took advantage of this and either purchased a home or refinanced their home at a lower rate.

While this was great for stabilizing the market, we now find ourselves in a situation where people have locked in their rate and are reluctant to move.

The worst is yet to come, what happens when interest rates start to rise? Those people who locked in their mortgage rates at 4 or 5% will be very reluctant to sell their home. They will find themselves in a situation where the increase in interest rates, make it far more expensive to buy even a smaller less expensive home than to stay where they are. This means a large percentage of the market will be locked into their home, severally restricting inventory levels.

Negative Equity

While the housing market as seen a sustained recovery, those people who purchased at the height of the last property boom may still be in negative equity.  Without going through a short sales process these homes remain stuck, with the homeowner unable to sell.

New Construction Market

The new construction housing market got hit hard in the last recession, and even at current levels new home starts are substantially below historic highs. While the excessive building of new homes is never good, the lack of a ready to move in homes does contribute to low inventory levels. Having said that in the Salt Lake area we are starting to see more and more developments building spec homes (homes built without a signed buyer contract), and in some areas these numbers are once again becoming excessive.

Capital Gains Tax Changes

Before 1997 the only way to avoid paying tax on property capital gains (for your primary residence) was to buy another home of equal or greater value. For people who turned 55 there was an option to take a one off $125,000 without paying tax. To take advantage of this, people always wanted to move up to a bigger and more expensive home and thus avoid paying tax (at least until a later day).

In 1997 all this changed with the introduction of the Taxpayer Relief Act. The new rules meant that people could take a $250,000 (single) or $500,000 (married) gain without paying tax. While this eased the tax burden for most, some of the most expensive areas saw an unforeseen consequence. Those areas that experienced high home price appreciation in an expensive market could exceed the new thresholds, and so people were more reluctant to sell given that they would have to pay tax. This meant there were fewer homes listed, restricting the inventory levels at the upper end of the market.

If I Sell What Will I Buy

Sellers are often reluctant to sell because there is nothing on the market that they want to buy. We have seen this first hand, where we have sold a property only to find that because of the low inventory levels the seller cannot find another suitable property to buy and have had to cancel the contract. This forms a never ending circle further restricting the inventory levels.

I am sure there are other reasons contributing to the low inventory levels, but even from those mentioned above, you can see that the problem is complex and it seems unlikely to change anytime soon.