Real Estate Inventory Shortage: A Deep Look at a Serious Problem
In case you haven’t heard, the housing market is red hot.
Homes are selling faster than almost any period before, and prices continue to climb upward. The reasons for this scorching market are numerous, but one of the related factors is the real estate inventory. There are simply fewer homes for sale, which means buyers are climbing over each other for fewer and fewer properties.
As economic wisdom holds, if supply declines and demand stays the same (or goes up), prices will inevitably increase. That’s essentially the situation in which we find ourselves today. But, while the problem is real, there are reasons to be positive.
Real Estate Inventory Shortage: Is Relief Coming?
Inventory Shortage: A Look at the Data
It’s pretty much standard knowledge that the real estate industry is facing an inventory shortage. But is this shortage real or is it falsely assumed? And if it is real, just how significant is the problem?
An important resource can provide clarity:
Economic Research, Federal Reserve Bank of St. Louis
One of the largest and most respected organizations in the industry, Economic Research division at the Federal Reserve Bank of St. Louis provides information on active listings, both across the country and for a variety of geographical markets. Organizing data procured from realtor.com, their information shows that the shortage is real and significant and that there has been a steady decline that started well before spring of 2020 and the COVID pandemic. In July of 2016, the nation had roughly 1.5 million active listings, a number that stayed steady into the fall of that year with the typical decline in winter.
In the summer of 2019, there was a high of about 1.3 million active listings; that number took a typical but steeper-than-usual winter decline to about 1 million. It’s been a steady downward trend ever since.
Inventory continued to decline, reaching less than 500,000 (half a million) in March and April of 2021. The latest data (June 2021) shows just over 548,000 active listings.
So there you have it. The industry as a whole, according to these numbers, is operating with about one third of the available inventory as we had in the summer of 2016. A 25% decline would be significant. A 66% decline? That’s momentous.
But what about individual markets? In certain places, the problem can be just as bad or worse. In San Diego County, for example, we were down to about 3,100 active listings, down from over 8,000 in October of 2018. In Los Angeles County, there were over 17,000 listings in September of 2019 but just over 10,000 in both March and April of 2021.
Why is There a Shortage for Real Estate Inventory?
All of this begs the question: why is this problem occurring at all? While we can cite numbers and figures demonstrating that a shortage exists, pointing out the specific causes is a bit more complex and includes more speculation.
One of the main reasons, it’s largely assumed, is that people are still waiting out the COVID pandemic. Homeowners don’t want to place their homes on the market at a time when it’s still possible to contract a devastating and highly contagious virus. For legitimate reasons, some homeowners simply don’t want to place their property up for sale, which would bring multiple visitors into their home.
When the inventory of existing homes is full, the market is usually supplemented by new housing. The construction industry fills the gap and builds homes that people can purchase. But COVID has created a significant reduction that is still being felt by many. With workers laid off and building prices soaring, construction was slowed in 2020, which has contributed to today’s market shortage.
What’s In Store for the Fall, Winter, and Beyond?
Because of the market conditions, many people have put their purchase efforts on hold. They’ve halted or simply paused their purchase efforts and have decided to wait until the market “stabilizes” to make a purchase. Of course, part of this stabilization will depend on housing availability. In other words: inventory.
It seems reasonable to assume that housing will recover and the inventory will return to “normal levels.” The market, as all free markets do, will be filled with the necessary products to meet the needs of consumers. For real estate inventory, it’s simply a matter of when.
There are reasons to be positive. For one, we are already seeing steady, albeit slow, gains from the inventory count. Last year, we saw nothing but month-to-month declines without the normal peak around late summer and early fall. In 2020, active listing counts in April were lower than March, May was lower than April, June was lower than May, and so on. This year, however, we are seeing more of a normalizing trend, with an increase starting in the spring and continuing through the summer. It’s not a massive spike, but it’s a trend in the right direction.
As we noted above, new construction is often used to ease inventory slumps, but last year groundbreaking slowed to a virtual halt. Companies simply weren’t building new houses. But since about spring of 2020, there has been a steady and sometimes rapid increase in new construction starts.
Data from Trading Economics shows that new housing starts bottomed out in the spring of 2020 but have since increased; these houses should be available to buyers soon, which means a supply of houses could ease inventory concerns in the near future. Whether it will make a significant impact, however, has yet to be seen.
All in all, there is reason to be positive that the inventory shortage will eventually ease. Developers will start meeting the needs of homeowners, and potential sellers, weary about COVID’s impact will, we hope, begin to feel more comfortable with the sales process.
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