Understanding Housing Inventory and What It Means for You

Anyone recently in the market for a new home is familiar with limited options. As of August 2022, the number of active listings for homes was up 26% compared to a year prior, according to realtor.com. After the housing inventory hit record lows in 2021 and early 2022, the number of active listings have been increasing year-over-year since May.

“During the pandemic, people stopped selling their houses,” says Lisa Knee, chair of real estate services for advisory firm EisnerAmper in New York City.

While people now seem ready to put the pandemic behind them, housing inventory levels could still take years to rebound. Experts say that’s thanks to factors ranging from the 2008 housing crisis to an influx of millennial homebuyers. The bottom line for buyers and sellers is that the housing market will continue to provide both challenges and opportunities for some time to come.

[READ:6 Questions to Ask Before Buying a Home]

Fallout From the Housing Crisis

The low housing inventory of recent years has some of its roots in an event that occurred nearly 15 years ago. “There really haven’t been enough homes built since the housing crisis,” Knee says.

After the housing market crashed in 2008, the number of new homes being built plummeted. There were 1.35 million new construction starts in 2007, but that number dropped to just 554,000 in 2009. New construction starts didn’t reach 1 million again until 2014 and have continued to lag below the 1.5 million number that was common in the 1980s and 1990s.

While there were 1.6 million new construction starts in 2021, Knee notes that nearly half a million of those were for apartments or multifamily dwellings rather than single family homes. And now, supply chain issues are causing delays in the completion of these properties.

With a shortage of new homes being built, that has pushed more buyers into the existing home market. However, that is not the only reason for low inventory levels.

Millennial Homebuyers Pushing Demand

A low supply of homes for sale is only half of the housing market’s current inventory woes. The other half is increased demand, particularly from a generation that previously opted out of homeownership.

“We have such a tight inventory because of that millennial group,” says Jeff Taylor, founder and managing director of Mphasis Digital Risk, which provides mortgage services solutions.

Millennials, who are defined as those age 23 to 41, are the largest living generation in the U.S. and have long been inclined to lower levels of homeownership than their predecessors. However, that seems to be changing. More than 4 in 10 homebuyers are now millennials, according to the 2022 Home Buyer and Seller Generational Trends report from NAR.

With the oldest members of Gen Z moving into their mid-20s, demand from first-time buyers for affordable homes could continue to swell and keep housing inventory tight.

[Read: 5 Tips to Help You Buy a Home in a Competitive Market.]

Remote Workers, Investors Driving Sales in Some Areas

While some people may have kept their homes off the market because of the COVID-19 pandemic, it has led others to relocate. As companies embrace remote work as a permanent option, employees who no longer have to commute are free to consider less costly or otherwise more desirable geographic locations.

A March 2022 report from the freelance marketplace Upwork found 2.4% of people say they have moved since 2020 because of remote work. Another 9.3% — totaling 18.9 million Americans — say they are planning a future move because of remote work.

Many of these workers are leaving large cities, such as San Francisco and New York City, according to Upwork. The cities that are attracting them are often in states with lower tax rates or, for those moving during the height of the pandemic, had fewer living restrictions.

“Areas like Arizona and Nevada are starting to see an influx of people,” says Edward E. Fernandez, president and CEO of 1031 Crowdfunding, an online platform for real estate investors who want to conduct 1031 exchanges of property to defer the payment of taxes.

In addition to remote workers, many investors are also competing for homes in desirable areas. “Investors are willing to buy property unseen,” Fernandez says in explaining the demand for homes in these regions.

Inventory Rebound Could Be Years Away

With so many factors affecting the market, it’s not likely housing inventory levels will rebound anytime soon. Still, the situation is expected to improve for buyers.

“As interest rates start going up, we should see a slowdown in the real estate market,” Fernandez says. He notes there can be a four- to six-monthlong delay before interest rate hikes make a noticeable difference on sales though.

Rising interest rates have cooled demand for new homes, which has kept listings active for longer, but ultimately they won’t affect the larger supply issues.

“We need to get that supply chain moving,” Knee says. Once more new homes are on the market, the inventory of existing homes for sale could see a boost.

But don’t expect changes any time soon. It’ll be “about four years before we see things level off,” Taylor says.

[Read: How Does Selling a House As-Is Work?]

Considerations for Sellers and Buyers

When there is low housing inventory , sellers could get top dollar for their homes. On the other hand, unless a seller owns a second home, they will need to buy a new house.

“(Someone) who is selling high is also buying high,” Fernandez notes.

Sellers should do their homework before putting their property on the market. If buying a new home is unaffordable, it may be better to stay put. For anyone worried they’ve missed out on selling for top dollar, Taylor doesn’t believe housing prices will drop.

“I think price appreciation will level off, but I think house values are extremely sound,” he says.

For buyers, the good news is that the days of double-digit percentage price increases have likely come to an end. The bad news is that there still may be limited housing choices on the market, and rising interest rates will make homeownership more expensive.

“The answer might be in the rental market,” Knee says. While rental prices are up and vacancies are down across the U.S., it might be a more affordable option for those who feel priced out of homeownership.

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Understanding Housing Inventory and What It Means for You originally appeared on usnews.com

Update 09/07/22: This story was published at an earlier date and has been updated with new information.

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