Expert Corner: From the Frontline with Rick Davidson

We are excited to launch Plotify’s Expert Corner, where leaders from the housing industry share their perspectives. Our experts add further context to Insights, where we decode the housing market and factors that influence it.

Within this update, Rick Davidson, the former CEO of CENTURY 21 Global and current Chairman of Cairn Real Estate Holdings shares current inventory conditions that real estate agents are encountering across the United States.

Unraveling Inventory Pressure and the New Supply Norm

In recent years, the housing market has faced a persistent challenge: a limited supply of existing homes for sale. This scarcity has affected first-time buyers, move-up buyers, and investors alike, as it restricts their options to purchase homes.

The national inventory levels currently stand at a mere 2.9 months of supply, indicating the estimated time it would take to sell the existing inventory based on the current rate of sales. A balanced housing market historically required 5-6 months of supply. While this current shortage is a national issue, it is worth noting that there are specific local markets where inventory levels are even lower than the national average.

To shed light on these low inventory levels, let's explore some of the factors influencing the shortage.

Insufficient New Home Delivery: The pace of new home construction has not kept up with household formation. Between 2012 and 2022, the gap between household formation and new home supply widened to 6.5 million missing housing units. Although the inclusion of multi-family construction narrows this gap, there remains a deficit of 2.3 million units to catch up with household formation.

Covid-19 Market Conditions: The surge in new home sales during the pandemic, fueled by lower interest rates, resulted in the significant absorption of new homes. At the same time, many existing homeowners remained hesitant to move during the pandemic, contributing to the scarcity of homes for sale.

Elevated Mortgage Rates: The rise in mortgage rates throughout 2022, starting at 3.1% in January and peaking at 7.1% in October, dissuaded potential sellers (move-up buyers) from listing their homes. Current homeowners are choosing to stay in their current homes due to the attractive fixed, low mortgage rates that they have secured versus current rates.

Affordability Challenges: The effects of elevated mortgage rates and previous home price appreciation, together, play a role in reducing the accessibility of homeownership. Current homeowners are unable to trade up due to a higher mortgage rate environment. Potential homeowners who are currently renting struggle to find suitable homes within their desired price range due to limited inventory and elevated rates.

These factors influencing low inventory will continue to pressure housing supply. A balanced housing market historically required 5-6 months of supply, but the "new norm" now hovers around 3-4 months of inventory. At the same time, low inventory continues to support home prices within many markets. While home sales have declined over the past 15 months, prices remain relatively stable as both demand and supply for homes have declined in balance with each other.

Looking ahead, it is unlikely that we will see a significant increase in inventory in the long term. The level of new home delivery over the past decade, combined with the consistent decline in inventory levels both before and after the pandemic, suggests a sustained scarcity of available homes. However, it is important to note that the real estate industry has uncertainties. Seasonality and broader economic cycles can rapidly change the picture, as demonstrated by the impact of the Great Recession.

Despite these uncertainties, home prices could continue to be supported by the persistently low inventory levels. We are witnessing multiple home offers across virtually every price point, driven solely by the lack of available properties. Unless we observe a substantial influx of "locked up" inventory entering the market, the competitive nature of the housing market is likely to persist.

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