This situation isn’t just tied to a pandemic – we started 2020 with a record low and it only went down from there. In fact, the inventory crisis has lasted a decade, fueled by five major trends that are unlikely to change anytime soon.
In March last year, Brad Inman invited me on his podcast to discuss the looming crisis we were both expecting in the real estate market. With businesses closing, job losses, and life standing still, we were pretty sure we were facing a market crisis, a spate of distressed sales and foreclosures, and crater-like demand and prices.
As it turned out, we were wrong. The demand for homes skyrocketed and prices rose 10 percent year over year.
But there was still a crisis – it just wasn’t about demand and prices. It was about inventory. There just weren’t enough homes to keep up with demand.
In fact, today’s inventory crisis is the biggest challenge facing the US real estate market since the mortgage bubble burst.
When I say “crisis” I mean this: Just a few years ago, a normal market had over 1 million single family homes for sale in February when we started increasing offers for the spring.
This year we’re on fair a third of the normal level.
In the stock statistics, the crisis is actually underestimated, since real estate is so in demand in many areas that it is immediately contracted. Tens of thousands of sales bypass the active market data altogether and spend essentially zero days in the market.
Only the hardest working buyer, well funded and armed with an aggressive buyer agent (and Real-time market data), even got a shot on these houses.
How did we get here?
This situation isn’t just tied to a pandemic – we started 2020 with a record low and it only went down from there. In fact, the inventory crisis has lasted a decade, driven by five major trends that are unlikely to change anytime soon:
1. Low interest rates
It may not be intuitive, but ultra-cheap money is a driver of both increased demand and decreased supply. When prices are this low, if I buy a new home instead of selling it, it will be very cheap to keep my first property for investment income.
This phenomenon of homeowners doubling down, buying but not selling, coupled with large institutional investments in single-family rentals over the past decade, is the reason there are over 7 million previously resalable properties that are now moving to the rental market were.
As long as prices remain low, this will continue. The only time this decade saw a year-over-year increase in inventory levels was when mortgage rates rose from 3.7 percent to 4.8 percent in the second half of 2018.
2. ‘Buy low, never sell’
Over the past decade, real estate income has increased as real estate costs have decreased. Innovations like Airbnb combined with an explosion of Alternative Housing Units (ADUs) made single-family homes more likely than ever to generate positive cash flow. It has been an excellent decade owning real estate.
The hangover from the bubble 12 years ago meant that building owners have built almost half as many houses in the past ten years and are only now reaching the long-term normal building level. This phenomenon limited the growth in the housing supply and exacerbated the effects of the low interest rate on the existing supply.
Underbuilding has given the market an ironic twist: Potential sellers are afraid to list their homes because there is nothing to buy. The cycle continues.
We are now well into the millennial era – there are more millennials out there than any other generation and that crowd is entering their prime years to make money and buy.
We have solid five to ten year millennial demand ahead of us. At the same time, boomers have had cheap mortgages for years and have held their homes for much longer than previous generations.
5. Homeowner Oriented Policy
The foreclosure moratorium of the CARES Act has prevented some properties from entering the market and instead remains in the hands of distressed owners. But the foreclosure pipeline was already at record lows before the pandemic broke out, and Americans have stepped up a trillion dollars of home ownership since then.
As a result, it is unlikely that pandemic homeowners will be added to our inventory anytime soon. Although there are still 2.5 million homeowners in the mortgage forbearance program, many of whom have not made mortgages in a year, these homeowners have accumulated significant equity during that time.
People default on a loan when the deal isn’t worth saving or when they turn the value upside down. This time, very few people face this situation.
The fact is, policy makers have focused on keeping people in their homes. Essentially, all of U.S. housing policy, whether tax, mortgage, or pandemic, is aimed at helping people who already own a home, often to the detriment of new buyers.
What will help us to get out of the crisis?
The most important factor is the mortgage interest. If interest rates fluctuate over time, watch out for a 3.5 percent threshold where consumers feel the pinch of higher payments. This will change how they calculate what they buy and what they hold or sell to fund the new move.
New buildings are also finally increasing and will enrich the market a little. More construction will be crucial for boomers to retire and for millennials to get their first homes.
We also need to change the policy focus from home-owner-centric to housing market-centric. Easing foreclosure and building policies would help, as would more flexible property tax rates, which would reduce the number of people bound to low-tax property.
The good news is that Americans gained trillions in wealth during this crisis. Even the most tragically affected were able to stay in their homes and benefit from a large increase in equity. And there is still a tremendous demand waiting to be unlocked – if we can create the conditions for it.
Michael Simonsen is the co-founder and CEO of Altos Research.