Trends 2024: Will we ever solve the inventory problem?
For more than a decade, housing supply has not kept pace with demand. Building more homes might seem like the answer, but there’s more to it than that.
Editor's note: Since 2006, the Swanepoel Trends Report has provided in-depth research and analysis to help leaders understand the forces shaping residential real estate. This exclusive series of excerpts highlights each trend featured in the 2024 report, which was released in November 2023.
Why Home Inventory Is and Will Likely Remain Low: Fundamentally, the inventory shortage is a result of two opposing forces: People are staying in their homes longer, reducing supply, while more households are forming, increasing demand. And construction isn't coming close to filling that gap.
This excerpt explores the leading causes of low inventory and provides a snapshot of possible solutions. The full chapter includes an in-depth analysis of the problem and strategies for real estate agents.
The inventory of homes for sale has inadequately met buyer demand since the housing market recovered from the housing crash that ended more than a decade ago. With each passing year, the homes shortfall increases, leading to a steadily growing housing deficit.
Low-inventory drivers
Although the homebuying frenzy of 2020 and 2021 has eased, the shortage of homes for sale persists, and, as the analysis below shows, several underlying trends drive this, along with near-term changes in market conditions.
Rising homeowner tenure
Since at least the mid-2000s, the typical length of ownership has trended upward. In 2005, the median length of ownership stood at 6.5 years with tenure rising to 13.4 years by 2020, according to Redfin data. With the increased pace of home sales in 2021 and 2022, the ownership tenure dropped, but remains at the high end of the two-decade spectrum.
The rise in tenure stems from two trends: one, homeowners are more frequently aging in place; and, two, many homeowners have secured record-low mortgage rates.
Aging homeowners
Homeowners 65 years or older are now the fastest growing group of homeowners, increasing by 34.1 percent between 2012 and 2022. The older, 65-years-old-plus homeowners in 2022 represented approximately a third of all homeowners (32.8 percent).
The growth in older households has one major inventory implication: Older homeowners move less frequently than their younger counterparts. As opposed to younger people, who move frequently because of life-changing events such as a new job, getting married, having kids, older people stay put for more time.
The mortgage lock-in
Many homeowners refinanced their home over the past several years when mortgage rates reached all-time lows, locking these homeowners into a rate much lower than they could secure now.
In the first quarter of 2023, nearly two-thirds (61.0 percent) of outstanding mortgage loans carried an interest rate of less than 4 percent, according to FHFA data. Nearly a quarter (23.3 percent), carried below 3 percent. Most homeowners with a mortgage (90.7 percent) have a rate below 6 percent.
Inadequate new home construction
An increase in the number of homesellers will not solve the inventory crunch alone. Filling the gap between supply and demand must also come from the construction of new homes.
The pace of construction has slowed relative to population growth, and, therefore, demand pressure has continued to intensify. More recently, single-family housing starts peaked at 1.2 million in the fourth quarter of 2020 but were 24 percent lower by the second quarter of 2023.
Potential inventory solutions
While there are many reasons for the inventory shortage, the number of potential solutions is limited. The aging of the population, the mortgage lock-in effect and inadequate construction are not amenable to short-term legislative or regulatory solutions.
But, despite the formidable hurdles, the search for relief continues. A variety of ideas have been discussed at the federal and local levels. They include:
Zoning changes
New financing options
Rural construction
Tax incentives for sellers
Commercial to residential conversions
Accessory dwelling units
Read the full chapter: Digital and printed copies of the 2024 Swanepoel Trends Report are available for purchase at T3 Trends.
Note: T3 Sixty and Real Estate News share a founder, Stefan Swanepoel.