Anyone in the market for a new home is well aware of the limited options. There were active listings for 714,176 homes nationwide in December 2023, according to Realtor.com data. While that was a 4.9% increase from a year before, it was a far cry from pre-pandemic housing inventory levels. In December 2019, for instance, there were 1.03 million active listings.
“Most cities are around 50-60% of the inventory they had prior to the pandemic,” says John Hunt, chief analyst and principal with MarketNsight, a housing research firm tracking markets in nine states. “We’re still selling houses at about 80% of the clip as last year.”
Nationwide, it’s been a slow market, according to John Walkup, co-founder of UrbanDigs, a real estate data analytics company. While many people blame interest rates, Walkup says, “I don’t think there is any one factor.”
Experts say current inventory woes have roots in the 2008 housing crisis and have been exasperated by high interest rates, government regulations and an influx of first-time homebuyers. For buyers and sellers, the housing market will continue to provide both challenges and opportunities for some time to come.
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Fallout From the Housing Crisis
The low housing inventory of recent years has some of its roots in an event that occurred more than 15 years ago. In 2008, the housing market collapsed, helping spark a global recession. The effects of that recession can still be seen today in the current tight housing inventory.
“A part of it is that we’ve spent 15 years underbuilding since the last (major) recession,” Hunt says.
Developers went out of business, and the number of new homes built plummeted. There were 1.35 million new construction starts in 2007, but that dropped to just 554,000 in 2009. New construction starts didn’t reach 1 million again until 2014 and continued to lag below the 1.5 million number that was common in the 1980s and 1990s.
As a result, the U.S. has a “massive undersupply of new homes,” says Tejas Joshi, director of single family residential and residential real estate for alternative investment platform Yieldstreet.
The annual rate of new home starts did reach 1.56 million in November 2023, according to Census Bureau data, but it will take time for those properties to be completed and ready for sale. With a shortage of new homes, that has pushed more buyers into the existing home market.
Government Regulations Stymie Growth in Some Areas
While the increased number of new home starts is encouraging, the process for approving housing projects can vary significantly across the country, according to Peter Curry, partner at law firm Farrell Fritz in Uniondale, New York.
New construction lead time is typically 18 months nationwide, Curry says, but in some areas — such as parts of New York — it could be up to three years. Even in areas with streamlined approval processes, it can take six to 12 months to get a project off the ground.
Compounding the problem are zoning regulations that may require large lots or setbacks that result in more expensive homes.
“Affordability is a massive issue,” Hunt says. However, he thinks the tide may be changing in terms of how local governments view housing. “We’re seeing a lot of cities finally getting on board with higher-density projects.”
Smaller homes and higher-density housing can fill in vacant spaces in otherwise built-out neighborhoods. They also may be less expensive for homebuyers. But unless interest rates come down, they still may not be affordable for some people.
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Interest Rates Driving Current Low Inventory
Of all the factors affecting the current housing market, interest rates may be the most impactful right now. “It’s not the rates themselves. It’s the trajectory of those rates,” Walkup says.
If interest rates were flat or expected to decline, some people may purchase homes and then refinance later. However, when rates continue to climb, that option becomes less appealing.
“If I don’t need to move, I’m not going to move,” Curry says.
More than nine in 10 homeowners had an interest rate lower than 6% as of June 2023, according to real estate brokerage Redfin. And 62% had a rate below 4%.
“You certainly don’t want to give up your 3% (interest rate) for 7%,” Hunt says. “That’s keeping a really tight lid on the market.”
With homeowners staying put, that means fewer existing homes for sale and fewer choices for homebuyers. “All the supply has come from homebuilders,” Joshi says. In a typical year, 10%-15% of sales are for new homes, but he estimates they now represent 30-40% of purchases in some markets.
Inventory Trends to Watch
With so many factors affecting the market, it’s not likely housing inventory levels will rebound anytime soon. If anything, inventory might tighten as interest rates start to drop and certain homebuyers begin to wade back into the market.
“Most of the discretionary buyers are first-time homebuyers,” Hunt says. These are the buyers who sat out as interest rates rose but will filter back in as rates fall. These individuals don’t have homes to sell so they won’t create more inventory by moving and, if anything, may increase competition for homes.
Some predict there may be a “silver tsunami” in which older retirees downsize and their homes flood the market. Hunt is skeptical that will happen, though. “I don’t think we’re going to see a huge jump in inventory.”
Joshi predicts that as interest rates moderate to 6%, more people will be willing to move. “We are looking at the markets and seeing optimism,” he says. “We remain pretty upbeat.”
Meanwhile, Curry thinks a trend to watch is creative reuse, a process by which existing buildings are converted to housing. He points to the conversion of New York’s JFK Hilton Hotel into affordable housing as one example. The massive parking lots at shopping centers in older suburbs could also be ripe for redevelopment into housing.
“I think that’s going to take off,” Curry says. “I think that’s going to be the wave of the future.”
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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.
“You should understand the market has already bottomed,” Walkup says of those who might be waiting for more favorable conditions. Looking forward, he sees the potential for a “scary period with a lot of inventory” if buyers don’t show up, but he thinks the market is moving in the direction of sellers.
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, housing prices don’t seem in danger of falling.
“We had a little bit of moderation in pricing at the end of (2022),” Hunt says. “Now prices are rising dramatically.”
For buyers, the good news is that the days of double-digit percentage price increases have likely come to an end. However, no one has a crystal ball to know exactly what the future might hold for housing inventory and housing prices.
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Understanding Housing Inventory and What It Means for You originally appeared on usnews.com
Update 01/24/24: This story was published at an earlier date and has been updated with new information.
