There are three main price-range segments — starter homes (lowest price range), trade-up homes (middle price range), and premium homes (highest price range) — and homebuyers are mainly interested in homes within their particular segment. For example, if you’re in the market for your first home, you probably don’t care too much about what the market is like for premium homes; you’re quite likely focused on those starter homes.
Trulia’s research shows that in 2016, starter homes saw the biggest decrease in inventory of all homes on the market, dropping by 10.7% from 2015. Trade-up homes dropped almost as much, 9.2%, for that same period. Premium homes dropped as well, but only by 3.6%. Low inventory often contributes to whether we have a buyer’s or seller’s market. The Denver, CO, market provides a good example. “There was bifurcation in the market for homes less than $600,000 and more than $700,000,” says Denver agent Matt Vos. “For homes below $600,000, it was definitely a seller’s market. For homes more than $700,000, it was more of a buyer’s market.”
The group most affected by lower inventory in 2016? First-time homebuyers. They paid 1.7% more for a home than they paid in 2015. Because this group paid more, a larger portion of their income went to housing. And that put first-time buyers close to (or over) the 36% debt-to-income limit many mortgage lenders allow.
“The low inventory made transactions much harder to accomplish,” says Vos. He found that buyers often needed to put intangibles in their offers to get deals done, such as offering to pay with cash, closing quickly, waiving the inspection or appraisal, or including a heartfelt letter.