Housing is in the middle of an inventory crisis

It’s no surprise to anyone in the real estate or mortgage industry that there’s a critical shortage of homes for sale – the four-month supply of homes for sale today is between 30-40% lower than the number of homes for sale in a normal, healthy market.

It’s also no surprise that a big part of this shortage is due to builders staying on the sidelines instead of gearing up production to meet demand. But what might be surprising are some of the other factors contributing to this lack of supply, and the impact these factors are having on prices, sales, and the housing market in general.

Supply and demand are two of the most basic components of economic theory. Too much supply, and products become commodities with falling prices. Too much demand, and scarcity creates bidding wars which drive prices higher. This, in an overly simplistic way, describes what’s happened over the last decade in the housing market.

The combination of an over-supply of new construction along with millions of foreclosed homes unexpectedly flooding the market while demand plummeted led to home values falling by over 35% nationally from peak to trough.

Some of the hardest-hit areas were those with a massive supply/demand imbalance: Las Vegas, South Florida, Phoenix, and the Central Valley of California. In those markets, and elsewhere, builders faced the unenviable task of selling new homes that were smaller and significantly more expensive than foreclosed homes they’d built as recently as the year before.

And all this was happening during the Great Recession – the worst U.S. economy since the Great Depression.

Unsurprisingly, homebuilders did the only logical thing they could do under the circumstances: they essentially stopped building new homes. Somewhat more surprisingly, ten years later – and after the longest sustained period of growth in the history of the U.S. economy – builders still aren’t building as many homes as they used to.

In fact, they’re not even building enough homes to meet demand, or enough to replace homes that are lost each year to demolition, disasters, or other causes.

Hope on the horizon?

There have been glimmers of hope on the new home front recently, however. Even though they’re down by almost 1% year-to-date, October housing starts were up 3.8% compared to September, and up by 8.5% compared to October of 2018. More importantly, starts of single-family homes were up 8.2% year-over-year.