For those on the hunt for a new home, the stark reality of limited choices has become all too familiar. Data from Realtor.com shows that in December 2023, the national housing market had 714,176 active listings, a modest increase of 4.9% from the previous year but still significantly lower than the inventory levels before the pandemic. In December 2019, the market boasted 1.03 million active listings.
John Hunt, a lead analyst at MarketNsight, highlights that “Cities are operating at just 50-60% of their pre-pandemic inventory levels, yet we’re managing to sell homes at about 80% of the rate we did last year.”
The slow pace of the market isn’t attributed to a single factor, according to John Walkup of UrbanDigs. However, the amalgamation of high interest rates, regulatory constraints, and a surge in first-time homebuyers, compounded by the aftermath of the 2008 housing crisis, presents a nuanced set of challenges and opportunities in the housing market.
Echoes of the 2008 Crisis
The scarcity in housing inventory can trace some of its origins back to the 2008 financial collapse, which precipitated a global recession and a downturn in the housing market.
“We’ve been underbuilding for 15 years following the last major recession,” Hunt notes. The dramatic decrease in new home constructions is evident in the drop from 1.35 million starts in 2007 to just 554,000 in 2009, with numbers not recovering to the million mark until 2014, significantly lower than the 1.5 million common in earlier decades.
This underbuilding has led to a pronounced deficit in new homes, as pointed out by Tejas Joshi of Yieldstreet, who mentions, “We’re facing a massive undersupply of new homes.”
Even though there was a rise in new home starts to 1.56 million in November 2023, according to the Census Bureau, the time required for these properties to be completed and hit the market means that many potential buyers are redirected towards existing homes.
Regulatory Roadblocks
The encouragement from the increase in new home starts is dampened by the varied and often lengthy approval processes across different regions, says Peter Curry of Farrell Fritz. For instance, it might take up to three years in certain parts of New York to get a new construction project off the ground.
Zoning regulations that dictate large lot sizes or significant setbacks further drive up the cost of homes, making affordability a significant issue. Yet, there’s a shift towards embracing higher-density housing projects as a solution to these challenges.
The Influence of Interest Rates
Current market dynamics are heavily influenced by interest rates, with their upward trajectory making the prospect of buying less appealing. This is underscored by the fact that over 90% of homeowners as of June 2023 enjoyed interest rates below 6%, with a notable 62% having rates below 4%.
With such favorable rates previously locked in, homeowners are less inclined to sell, tightening the grip on housing inventory. Joshi observes, “Homebuilders are currently the primary source of supply,” with new homes representing a larger portion of sales in some markets than historically noted.
Looking Ahead: Inventory Trends
The interplay of various factors suggests that a swift recovery in housing inventory levels is unlikely. A potential decrease in interest rates might draw first-time homebuyers back into the market, exacerbating the competition for homes without adding to the inventory.
Speculations about a “silver tsunami” of retirees downsizing and thus increasing market inventory are met with skepticism. However, there’s optimism that moderating interest rates could encourage more homeowners to sell, potentially revitalizing the market.
A notable trend is the creative reuse of existing structures for housing, such as converting hotels into affordable living spaces or redeveloping underutilized shopping center lots. This approach could emerge as a significant avenue for addressing the housing shortage in the future.
Insights for Home Sellers and Buyers Amidst Scarce Inventory
The current landscape of limited housing inventory presents a unique scenario for both sellers and buyers, with implications for each group.
Sellers stand to benefit significantly in a market starved of listings, potentially fetching premium prices for their properties. However, the equation becomes complex for sellers needing to transition into another home post-sale.
John Walkup advises those on the fence about selling, suggesting the market has reached a nadir and cautioning about a potential future glut of listings should demand wane, though he remains optimistic about a seller-favorable shift.
It’s crucial for sellers to thoroughly research the market before listing their homes. With the cost of acquiring another property potentially prohibitive, staying put might be the wisest choice for some. Despite fears of missing peak sale prices, the market hasn’t shown signs of a downward trajectory in home values.
“We saw a slight moderation in prices towards the end of 2022,” mentions Hunt, “but now, we’re witnessing a significant surge in prices.”
For prospective buyers, the landscape appears slightly more hopeful. The era of steep annual price escalations may be drawing to a close, offering a silver lining. Yet, the unpredictability of future housing inventory levels and price trends remains, underscoring the importance of navigating the market with care and informed judgment.
