One of the bigger surprises of the COVID-related financial and health crises is that existing home inventory fell along with demand.
American housing bears expected monthly existing home supply to skyrocket and home prices to drop when demand fell during the stay-at-home period of the crisis.
But as home sales fell, so did inventory. Home prices not only held firm, but the median sales price increased by 7.4% year over year.
According to the National Association of Realtors, total housing inventory at the end of April was down 1.3% from March 2020 and 19.7% from April 2019.
The monthly supply of existing homes – which is the ratio of houses for sale to houses sold – was 4.1 in April, up from 3.4 months in March. Generally, as the spring and summer months come, the monthly supply of homes increases. Then in fall and winter, that monthly supply drops.
Ultimately, if demand stalls out over time, homes could take longer to sell.
How much inventory does a market need to be healthy?
A wide-spread truism is that the monthly supply in a balanced housing market should be around six months.
But the topic of whether we have too much or not enough housing inventory for a healthy market is much more complicated than it seems.
Columnist
After 1996, when mortgage rates fell and increased housing demand, the monthly supply for existing homes didn’t breach above six months except during the housing crash years of 2006-2011. During that period, an over-supply of new construction combined with millions of distressed sales and foreclosures flooded the market with inventory causing home values to plummet.
Since then, the only time inventory was close to six months was in 2014, when purchase applications were down 20% year over year. When adjusted to the population, that was the lowest level ever recorded in U.S. history for that index.
But even then, inventory still did not go above six months. (See below).
In 2019, before the COVID-19 crisis, the housing market behaved like a regular market. Inventory was up year over year during the first few months, and sales were down compared to the previous year.
As such, real home prices went negative year over year, and nominal home price growth cooled down. Then, as mortgage rates fell and demand picked up, the rate of growth in home prices picked up.
So…what about the inventory crisis?
For the past eight years, housing analysts were in near-unanimous agreement that the U.S. housing market was in an inventory crisis.
I did and continue to disagree. Here’s why:
Based on new home sales, mortgage demand and housing starts, the previous housing cycle from 2008 to 2019 had the weakest demand recovery ever recorded in U.S. history.
And remember, this “weakest demand” was during the longest economic and job expansion ever recorded in history with mortgage rates at 5% or below since 2011.
I have stressed for many years that the country needs to wait until around 2020 through 2024 when we have the right demographics and low mortgage rates to generate the demand for 1,500,000 housing starts.
Lest you forget, it was only a short time ago in 2018 when mortgage rates hit 5%.
This had such a negative effect on demand for new homes that housing starts were flat for the entire year of 2019. As it took a full year to get rid of the excess supply that the builders had from the demand shock late in 2018.
As demand grew the monthly supply of new homes (see below) fell to a more comfortable level to promote growth again. The monthly home supply for new homes during the pandemic has not even surpassed the highs in inventory caused by the increase in mortgage rates to 5%.
Builders aren’t dumb, and they learn from their mistakes. They are only going to build the number of homes that they can justify based on the current and expected future demand of their clientele.
Limiting supply means they can keep the demand for their higher-priced, geographically limited inventory. The existing home inventory makes for a fierce competitor to the new home sales market. The existing home inventory is much bigger, cheaper and geographically diverse. Every decade that goes by adds to the existing homes, providing even more choices for the buyer and more competition for the new home market.
But this logic will not stop the clamor for more new housing to be built.
If we are really serious about adding more supply, especially to the lower end of the market where the inventory is most needed, we will need the federal government to deficit finance a significant infrastructure package. We will then need to support the development of these homes in the areas most in need of low-cost housing – the high rent areas in large urban areas where the jobs are.
This means we will need to break the NIMBY powers that be and ease zoning rules that have been created with the expressed purpose of keeping this development out.
Unless we are willing to do all of this, talking about increasing inventory is pointless. So what is your bet? Are we going to continue with our pointless jabbering, or are we going to do something about it?
