In certain Philadelphia neighborhoods, it's not unusual to see hopeful homeowners jostling to buy houses; Rittenhouse Square, Society Hill, and Fairmount have topped the list for years.
It's in these highly desired, affluent areas that home buying has become a full-out frenzy. To secure properties, buyers have been offering to pay prices well above asking or have been waiving typical provisions such as the appraisal contingency, thus preventing the buyers from exiting a sale, even if an appraisal is lower than the original sale price.
But these days, historically overlooked neighborhoods beyond Center City have been experiencing that same housing mania. Last month, Realtor Michael P. Cohen told me he listed a house in Overbrook Park in West Philadelphia on a Monday — and by Wednesday, he had 11 offers. And in South Philadelphia, Realtor Kristin McFeely, with the Philly Home Girls team at Coldwell Banker Preferred, also listed a house in July on the 1400 block of Jackson Street. Within a few days, it had eight offers.
"It's a fine, stable area," McFeely said. "Not an area that you would consider a hot neighborhood, but there are still multiple offers for houses down there."
The driving force behind this excitement is historically low inventory — a real estate term used to describe the number of houses for sale at a given time. A balanced, healthy supply is considered "five to seven months," meaning how long it would take to deplete the supply of homes on the market if no listings were added.
In Philadelphia alone, today's supply is at 3.1 months, nearly half of what real estate professionals consider healthy.
Real estate professionals and industry analysts agree that today's inventory is a problem. At three months, it's considered a seller's market, meaning that buyers are often competing for homes and paying more than they typically should. And it has big implications for first-time and low-income buyers: Fewer total homes can mean fewer starter homes, forcing hopeful home buyers to either splurge or remain renters.
What real estate professionals do not necessarily agree on, however, is what is driving such low inventory.
Trulia chief economist Ralph McLaughlin recently tested five leading theories to determine which have the greatest impact. Rather than test them in isolation, Trulia controlled for the impact of other factors.
The good news: McLaughlin determined that two factors, in particular, have significant influence on inventory levels.
The bad news: Unless something changes dramatically, inventory may not increase any time soon.
According to McLaughlin, the two biggest influences on inventory are new home construction and investor ownership. For every one percentage point increase in a market's housing stock between 2010 and 2016, total inventory was about 13 percent higher on average across the United States, Trulia found.
For example, if the Philadelphia metro area had increased its total housing stock by 1.2 percent between 2010 and 2016 — rather than the just 0.2 percent that it actually did — the area could add 807 more homes to its inventory this year. (For this study, Trulia defined the Philadelphia metro area to include both Philadelphia and Delaware Counties.)
At the same time, Trulia found, for every percentage point increase in investor-owned housing, inventory dropped 2.8 percent on average between 2010 and 2016. As for the Philadelphia area, if investor ownership dropped from 41.9 percent to 40.9 percent, the area would have 173 homes more homes listed for sale this year. (In its study, Trulia included both single- and multi-family homes to measure inventory. Investor ownership appears high because of the number of apartments in the area.)
"The housing market is very interconnected," McLaughlin said in an interview. "When all homes get filled up and vacancy rates are basically zero, you get gridlock, and that's what we have seen across the country."
"For every house that's owned by an investor, that's a home that will potentially not be sold because the investor is holding on to it for renting or for the income," McLaughlin continued. "… And while new construction is a bit of a no-brainer … new homes provide a place for people to go, which frees up their home, which frees up another home."
With new construction remaining sluggish and with investor-ownership in the area still high, will we see any kind of rapid change?
"I am skeptical that there will be enough building that can happen before the next downturn to help relieve inventory," McLaughlin said. "Investors who bought during the bottom of the housing market might think about selling in the next couple of years."