While the inventory of new and existing homes is tight, competition for smaller homes is heating up as aging baby boomers are down-sizing and selling their residences.
Those 55 years and older are clearly in the market for a smaller home and are competing with millennials, those 18-34 years old, and other first-time buyers who are searching for smaller homes, according to Felipe Chacon, a housing economist at the real estate listing firm Trulia, based in San Francisco.
But boomers have an edge that many younger borrowers lack, a deep credit history and equity from their existing home.
"They are not going to run into as much resistance on the mortgage side that the first-time buyer will, so that would give them the leg up," Chacon said in an interview.
Sam Khater, the deputy chief economist of CoreLogic, said that a lot of attention is paid to millennials, but "what is less known is their participation rate in the purchase market is declining."
In 2013, the percentage of purchase applications for borrowers less than 30 years of age was 15%, but that fell to 13% in 2015, Khater told a National Association of Business Economists conference on Tuesday.
Nationally, housing inventory fell in the fourth quarter for the sixth consecutive quarter, dropping 9.1% from a year ago, according to Trulia's most recent quarterly survey.
The inventory of homes suited for first-time homebuyers suffered its steepest year-over-year drop in three years, falling 12.1% since 2015. Moreover, such buyers will need to pay 1.9% more of their income on average to buy a starter-home in their local market. Meanwhile, premium home inventory fell a more moderate 5.6%, according to Trulia.
There is a "mismatch" in terms of the inventory and the types of homes buyers are searching for.
"More searchers are looking for starter homes, but more listings are for luxury homes," said Kristin Reynolds, a housing analyst at IHS Markit. "So that is a mismatch and it will cause price increases at the low end as boomers look to downsize and first-time buyers are looking at the same homes. It is an interesting time."
Trulia is also noticing that house prices have softened in some premium or luxury home markets.
"We are seeing a cooling in the premium price increases while starter and trade-up prices are still escalating quickly," Chacon said.
The number of existing homes for sale in January was down 16.9% from January 2016, according to a Feb. 17 Remax Housing Report.
“January may have set the tone for the coming home-buying season with homes selling faster and at higher prices,” said Dave Liniger, Remax chief executive and chairman. “Homebuyer demand is strong, and not enough sellers are listing to keep up with the demand, despite rising prices."
Homebuilders have been increasing their construction activities in terms of overall production. But they are also being careful in managing their inventory.
There were 261,000 new homes for sale (not seasonally adjusted) at the end of January, including 65,000 completed homes, 147,000 homes under construction and another 49,000 homes where construction hadn't started, according to the Census Bureau.
"In January, the number of new homes offered for sale, but not started, was at the highest level since 2008," Reynolds said.
It shows the builders are "cautious," she added. "They are offering these homes for sale but they haven't started them yet. That increases supply without putting too much at risk."
It a makes good business sense, said Robert Dietz, chief economist for the National Association of Home Builders.
Considering the "tight inventory conditions, in some cases it makes sense for the builder to get the contract," Dietz said, before construction starts.