As rental rates skyrocket and an entirely new generation of homeowners enters the housing market with dreams of owning their piece of the American Dream, the lack of inventory in most major cities nationwide is making everyone scramble.
Even with record-high gas prices, rising inflation, and astronomical interest rates, the demand for housing is still steady. Because of this, more and more investors are scrambling and racing against each other to grab available single-family homes where they can, causing a shadow demand for housing.
What is shadow demand, and how will it impact the future housing market and investors? We’ll discuss this and more in today’s article.
What’s Shadow Demand?
Shadow demand isn’t a new trend, but it has been making headlines in the recent news. This phenomenon happens when there’s high demand for housing properties but not enough inventory. To give you a concept of how shadow demand came to be, we have to look back at the history of the housing market by a decade.
The Rise Of Shadow Inventory During The Housing Crisis
The 2008 housing crash left banks with many foreclosed properties on their hands.
As foreclosures skyrocketed, banks began flooding the market with their excess properties, listing them at ultra-low market pricing to break even.
As time went on and the foreclosure rate continued, the housing market began weakening even more, and property values were tanking across the nation. This led banks who could afford to hold inventory for some time to put a plug on their aggressive selling activities.
Instead of flooding the market with foreclosures as they arose, banks began releasing them to the market in a slow drip format over the next several years. These properties became known as shadow inventory.
How Institutional Investors Profited Off Of Shadow Inventory
Shadow inventory presented a unique opportunity for institutional investors who typically had plenty of capital on hand and limited options for investing their billions of dollars.
These investors saw the opportunity to purchase shadow inventory as banks released their excess homes to the market at a low price. With sights set on the potential appreciation of this shadow inventory once the market stabilized, investors began building their single-family rental portfolios.
This investment strategy has paid off for institutional investors since most homes in major markets have appreciated upwards of 20% since the 2008 housing crisis.
Four Factors That Are Driving Today’s Shadow Demand
Now that you understand what shadow inventory is, let’s look at four factors driving the current shadow demand in today’s housing market.
#1 – Increased Interest Of Institutional Investors
The demand for shadow inventory by real estate investors looking to capitalize on the high appreciation rates of single-family homes has only increased in recent years since the last housing crisis. This increased attention has driven a new shadow demand for housing that investors have been scrambling to scoop up in hopes of getting their slice of the appreciation pie.
#2 – Low Construction Rates
Another factor fueling the shadow demand has been the low construction rate of new single-family housing throughout the country. This low construction rate resulted from the slow turn-up process in building new homes after the 2008 housing crisis. Multiple home builders had to stop building and sell their new inventory at astronomically low rates.
Since then, construction has picked up. But, it will take many more years of new solid construction numbers for the nation to compensate for the lost time.
#3 – The Global Supply Chain Crisis And Labor Shortage
Since the pandemic hit in 2020, issues in the global supply chain and labor shortages have also put a damper on the new construction of single-family homes.
With builders scrambling to find both the building supplies they need to complete their projects and the contracted labor, the construction industry has not been able to ramp up its production of single-family homes to meet the rising housing demand. Most new home builders have already pre-sold most of their lots and hold a waiting list of up to 1-2 years out for prospective new home buyers hoping for a new build.
#4 – Record Low Housing Inventory
Thanks to the low construction rates of new homes, the covid-19 pandemic causing renters to rethink their living situations, and a brand new generation of home buyers entering the market, the inventory of homes available in most major cities have hit record lows.
All of this, coupled with the demand for inventory by institutional investors looking to capitalize on today’s soaring appreciation values, the nation has experienced an inventory crisis that may take a while to entirely correct.
All of these factors and more are driving today’s shadow demand. So what does this mean for the future of the housing market? Keep reading to the end to find out.
How Will This Impact The Future Housing Market?
The real estate industry is flourishing despite the signs of an economic recession. With the American Dream even more ignited by the recent pandemic and the increased interest of investors in single-family homes, experts still forecast a strong housing demand from 2022 to 2025.
While a housing bubble like the 2008 market crash is unlikely anytime soon, large investment firms and hedge fund corporations are preparing to snap up any inventory that may enter the market through foreclosures and shadow inventory in the future.
These financial organizations have billions of dollars on hand to aggressively snap up available housing properties for sale in the area, especially in strong markets such as Austin, Texas. They can also afford to sit on them for several years. This means that the housing market’s posed for solid returns for many more years despite economic uncertainties.
Looking To Invest In A Real Estate Development?
Red Oak Development Group is one of the fastest-growing real estate development firms in Austin, Texas. We’re focused on growing our portfolio of projects to supply the increased housing demand in our area. If you’re interested in learning how to become an investor on one of our projects, schedule a call with our CEO today.
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