One of the biggest challenges facing the nation’s residential real estate market is the very low inventory of available homes for sale. The lack of “For Sale” signs seen across the country is one of the primary reasons why we have been positive about the direction of home prices in the past few months, despite the significant increases seen in recent years. Presently, the number of existing homes for sale is at its lowest level in more than 20 years.
There are a number of reasons for this phenomenon, which include insufficient numbers of new homes being built relative to our growing population. The chart below shows a long-term picture of new housing dating back to 1970, with the main takeaway being that the recovery in hew home construction since the Great Recession in 2008 has brought the numbers back to only slightly above the averages of the previous cycles.
Without a significant increase in the number of new homes being added to the nation’s housing inventory, the burden falls on the existing market to fulfill the balance of demand. The chart below shows the overall U.S. monthly number of existing single-family homes and condominiums for sale leading up to and after the Great Recession. As seen, after a steady decline since recovery began, inventory has nosedived since the nation began to confront another crisis – the COVID-19 pandemic. Single family homes in particular have been disproportionately affected by this inventory decline.
We can see why these numbers have gone off a cliff, so to speak, by looking at the number of new listings per month as shown in the chart below, which analyzes data for the top 50 metros. Note how the normal cyclical pattern of rising and falling numbers was interrupted in the spring of 2020. We should have seen far more homes for sale, and this lack of inventory has thus far not recovered.
The monthly number of existing homes being listed for sale is typically very consistent and peaks each year in April and May. However, with the onset of the pandemic last March, the number of homes coming on the market fell by about 45% at that time, and new listings have continued to run below previous monthly levels.
Some of this can be explained by sellers not wanting a parade of potential buyers to tour their homes during a time of uncertainty around a contagious virus. We also have some anecdotal evidence of homeowners deciding to renovate or expand their current homes with the idea that working remotely will be much more prevalent in future years. Previously, they may have been in the market to purchase another home but, with available inventory limited, they decided to remain in their current home. In fact, the lack of move up and move down inventory is having a domino effect, scaring some sellers from listing their homes for sale. These would-be sellers may fear not being able to find a satisfactory new home.
In the chart below, we look at the shortfall in the top 50 metros in 2020 after the pandemic began compared to the same period of 2019. In aggregate, there were about 15% fewer new listings. However, some markets, such as Detroit, Kansas City, Cincinnati, and Charlotte experienced even larger declines. This helps explain the high demand-to-supply imbalance that has driven up prices so rapidly in many of these markets.
The longer-term inverse relationship between home prices and the inventory of homes for sale is apparent in the figures below, which show the two series dating back to 2006 for two of the top metros, Kansas City and San Jose. The Kansas City CBSA is one of the markets which has experienced the sharpest decline in homes for sale since the pandemic began. Not surprisingly, this has been accompanied by an acceleration in its rise in median home price as seen in Figure 5.
In contrast, the San Jose CBSA has not experienced a decline in homes listed for sale over the past several years, which has led to a plateauing of median prices as seen in Figure 6.
As has been made obvious in the past year, the COVID-19 pandemic has fundamentally shifted many market forces, and low inventory is just one part of the story. However, the ripple effect felt by the remarkably low number of available homes for sale will continue to impact the market in various ways. At Black Knight, we will continue to monitor these effects and publish further stories as the data becomes available.
Using its Daily Home Price Flash, Black Knight’s Collateral Analytics analyzes home sales and pricing information for major U.S. markets on a bimonthly basis and publishes its findings on this blog.