“The market is struggling with a large housing undersupply just as 4.8 million Millennials are reaching 30-years of age in 2020, a prime age for many to purchase their first home,” George Ratiu, Realtor.com .
TOP STORY: _ Short Supply
Home buyers seldom think there are enough listings on the market while there is always too much competition to suit a seller. But rarely has the number of homes for sale, i.e “the inventory,” played such a central role in the housing conversation. Literally every housing report over the last four years has invoked it as a “leading cause” of any and all negative data, because the numbers of homes for sale has never dipped so low.
Housing inventory is quantified in several ways. There is one report on the available stock of newly constructed single-family homes from the Census Bureau and the Department of housing and Urban Development, and one for existing homes, which also tallies condos, townhouses, and cooperative apartments, from the National Association of Realtors (NAR). When someone talks about total inventory they are aggregating the two.
Inventories are reported both as the sheer number of homes on the market and as a “month’s supply.” The latter estimates the time it might take the market to absorb those numbers at the current sales rate. If sales are slow, the month’s supply could increase even as the numbers decline.
Balancing Act
NAR has long stated that a balanced inventory, one not necessarily favoring buyers or sellers, is six months. A tight inventory works to the benefit of sellers, leading to shorter marketing times, competition over the most desirable homes and thus higher prices. A larger supply not only gives buyers a wider selection, but more opportunity to negotiate price and contingencies.
While real estate usually cycles regularly from a buyer’s to a sellers’ market, the whole inventory situation began to go seriously haywire in 2015. While there have been recent improvements, some experts fear an inventory “crisis” that could be semi-permanent and cause real economic pain.
Tale of Two Totals
New home supplies are constrained, but not markedly so. In Census Bureau records going back to 1963 the largest inventory was 537,000 units in 2006. At that point builders took the hint and pulled back. Permitting dropped by more than 30% between 2005 and 2007 driving inventories to 188,000 by 2012. The last available count, for October of last year, was 322,000 available new homes, not far out of line with the 20-year average of 311,000. Still, what appears to be a nearly normal supply is thought to be concealing a different issue we will get to later.
Supply problems are definitely problematic for existing homes. Before breaking the streak in June of 2018, inventories had declined on an annual basis for 37 straight months. In December 2017 the number of available homes hit the lowest level in NAR’s records dating back to 1999, 1.48 million units. The numbers have improved only marginally since. At last count there were 1.77 million existing homes for sale, a 3.9-month supply. The situation is more dire at the lower price points. Entry level homes tend to fly off the market, keeping supply even lower and compounding affordability issues.
Seasonal Shifts Shrink
Inventories are seasonal. Real estate agents often encourage sellers to put their homes on the market in the spring. There are weather and school calendar related reasons for this, but they cite an influx of potential buyers out and about as well. Of course, those buyers are there because they heard there would be more homes to choose from.
We looked at several years’ worth of NAR data and found that the months- supply estimate does typically begin to build in March of each year, peaks in August, and then reaches a low point in December, January, and February. However, the diminishing supply of homes is affecting the entire calendar, shrinking the differences in monthly numbers and keeping the months’ supply in a narrow range, clumping just below and above 4 months.
Contributing Factors
Why are inventories so low? Let us count the ways. Structural forces, economics, social changes, and demographics have all contributed to the current problem. Some of the causes are circular, many seem immune to easy solutions, and in some cases, one cause will exacerbate others.
Let’s start with a structural concern; the nation’s housing stock. The Census Bureau says that even if no new households form, no buyers enter the market, no one ever wants to move, still about 350,000 units must be added annually to replace homes lost to fires, floods, lack of maintenance, or change of use. The housing stock is also unbalanced; large inventories exist in some areas where there is little demand because of shifting populations and jobs. But, in much of the nation, supplies remain low—3.1 months on average.
Demographics are major. The Millennials, America’s largest ever generation have been coming of age, forming households, and looking for a place to put them for nearly a decade. They are still lagging earlier generations in terms of homeownership; nonetheless they have been gobbling up inventory for several years.
The Root of the Problem
Earlier we noted new home inventories are not seriously out of line with historic levels, but residential construction is. This is a major factor in the supply problem. New home construction plummeted even before the housing crisis, falling from a peak of 1.98 million units in 2006 to 584,000 in 2011. Since then the numbers have increased gradually, but a stat from Freddie Mac stands out. In the 40 years preceding the crisis, and despite rising demand in a growing economy, there was only one year in which fewer new housing units were built than the 1.25 million units constructed in 2017. Construction in the two years since has essentially stalled. The Census Bureau estimated 1.387 million units were completed through September of last year, including those intended for rent.
Freddie Mac’s economists recently estimated 1.62 million new housing units (owned and rental) are needed each year to meet demand. This gives us a shortfall of over 900,000 units. Obviously there is an easy fix, just build more houses.
Obvious or not, it isn’t happening. Builders have encountered a series of headwinds since the recovery began. At first they were hesitant to build on any scale until they were sure the houses would sell. In the meantime, their laid-off workers, found employment in other industries, and there were materials shortages as suppliers resolved their own recession- Telated problems:
TRADING SPRAWL FOR A VIEW
Los Angeles has long defined urban sprawl, but now some residents are adjusting to more dense living arrangements, demonstrating strong demand for high-rise apartment units in the city’s most populated areas. Can condos be far behind?
Nick Griffin executive director of DC- BID says “The apartment buildings in Downtown Los Angeles are fantastic with great amenities, but they are also touting that they are within blocks in any direction to more restaurants and bars and fun things to do than you could ever want.”
The high acceptance of these rental units Griffin says could lead naturally to developing condos as well. “If a market is untested on the rental side, it is much more risky to build condos.” Kelsi Borland, GlobeStreet.com
Persistent Problems
Nearly a decade later some of these problems remain. The National Association of Home Builders (NAHB) says unfilled jobs in the construction industry reached a post-recession high last year, and, while builder confidence has increased significantly, NAHB’s index measuring it has stalled in recent months. Other more persistent barriers have emerged as well. NAHB cites the lack and costs of residential lots, a certain level of NIMBY among residents resistant to development, and especially local subdivision zoning, and building regulations which prohibit or delay construction or drive prices higher.
That inventories of new homes have remained so steady given the construction stats is largely due to erratic sales. These, in turn, can be traced to rising home prices resulting from the costs of each of those headwinds listed above. Prices are keeping first-time buyers out of that market and builders are reluctant to dive into more aggressive building when charge for appraising a single item. Some will even appraise from a photo.
Clothes closets may call for a special brand of ruthless. If necessary, invite a trusted friend to a fashion show and demand total honesty. Is it in style? Does it fit? Is there a chance it ever will? If it has dust on the shoulders, out it goes.
Be realistic about your changing lifestyle. Will you need pruning shears and – six gardening books to care for the terrace tomato plant? Are you really planning to ski or play hockey again?
If you are holding a garage or yard sale price stuff to move and be ready to haggle. Yard sales are a lot of work so consider hiring an expert to run it. Maybe donating items or sending them to a consignment shop would be a better use of time and energy.
It can be easier to part with something if it goes to someone who really wants it. Assemble the relatives and maybe some friends and give them a chance to put dibs on the extraneous stuff.
Pack with your destination in mind. Just because it is currently in the guest bathroom doesn’t mean it won’t end up in a linen closet or a basement storage locker at the new place.
If your new place is significantly smaller than the old, everything you keep means something else you can’t. A lot of tough decisions will get easier if you ask yourself “This table or that one?” or when you remember “$0.50 cents a pound.”
HOW LOW CAN IT GO?
Ten years ago, mortgage delinquencies were rising rapidly and would eventually top 10% of all outstanding mortgages. Times have definitely changed. CoreLogic recently announced that only 3.6% of all mortgages were 30-days or more past due, including loans in foreclosure, the lowest rate in more than 20 years. Serious delinquencies—those over 90 days—and the number of loans in foreclosure are also at two-decade lows.
CoreLogic Chief Economist Frank Nothaft credited the current delinquency rates to a 50-year low in unemployment, rising home prices, and the high quality of loan underwriting. CoreLogic Loan Performance Insight Report
Don’t Accumulate
Stop shopping. No new shoes, books, or gadgets for the duration of the move. Plan meals around your pantry and freezer, use up paper and cleaning products, buy only what you will consume in a month. Life can go on without catsup or capers.
WHATEVER WORKS
That they look like an army of alien spacecraft might not matter once the water and A/C bills arrive. These concave-roofed houses, designed by Iranian architectural firm BMDesign Studios, are meant for arid regions, capturing even small amounts of rainfall that can be harvested before evaporating. The water is stored in tanks in the houses’walls, cooling and insulating them. The shape of the roof also provides shade and allows airflow between the interior layer of roof, helping keep the house below cool.
The company is building a school as a prototype. It is expected to collect and store over 7,000 gallons of water with 10,000 square feet of rooftop. Sabrina Santos, ArchDaily
Paper breeds indiscriminately, but with so many bills and statements now available on-line there is no need to maintain piles of it. Askyour tax expert which bills and receipts you should keep and for how long. You can probably throw out most other cancelled checks (if your bank still provides them) once your account is reconciled and non-deductible and uncontested utility, credit card, and medical bills can be discarded as paid. Homeowner and car insurance policies, riders, and notifications are needed only for the duration of the policy year, but appliance manuals and valid warranties go into a kitchen drawer for the new owner.
Review paper with one thought: in your wildest dreams can you imagine the IRS, your attorney, accountant, alma mater, brother-in-law, priest, or rabbi ever asking you to produce that document?
That doesn’t apply however if your career requires detailed record keeping. Check with your professional association or licensing authority about legal obligations, some patient/client files might need to be retained “forever.” Commercial records storage could be a worthwhile solution to an attic full of banker’s boxes even if you aren’t moving.
Professional Support
A lot to do and sometimes selling one house and buying another imposes even more time constraints than you might have thought. It would be smart to consult your loan officer about timing options on the buying end before you make any purchase offer.
Finally, a good real estate agent is a terrific asset. Consult him or her on what to keep out of boxes for “staging” the house. Some agents maintain lists of charities that take household goods, cleaners who will haul stuff away, people who run yard sales, take goods on consignment, or buy whole or partial households.
If downsizing is in your future, good luck. By-the-way, no one really wants those National Geographic and Life magazines in the cellar. Trust us. No one!