Recent homebuyers are likely aware of the severe housing shortage. The National Association of Realtors (NAR) reports that the inventory of homes for sale in the United States hit a record low of 1.6 months in January 2022. Since then, the figure has increased, but only somewhat; the available stock still needs to be improved.
Homebuyers may recognize the problem of a lack of available homes, but this is a complex issue with no simple answer. What you need to know about the housing scarcity in the United States, its root causes, and its effects on the market as a whole may be found below.
To what end is the housing market experiencing such a shortage?
The housing market has been hit hard by the effects of COVID on the cost of building supplies, the disruption of supply chains, and the shortage of available workers. The issue, however, predated the pandemic. The United States needs to catch up in meeting the needs of its rapidly expanding population. (Especially about millennials, a sizable demographic that has entered the homebuying age range.)
The prominence of institutional investors that purchase huge portions of housing inventory for profit contributes to the scarcity. A 2022 NAR survey found that investors accounted for over 13% of residential real estate transactions 2021, taking homes off the market for individual buyers.
The Great Recession of 2007-2008 is a different contributing element. According to data from the St. Louis Fed, this significantly affected the housing supply: More than 2,200 new homes were built in January of 2006, capping up a year in which new home construction had been on the rise. Then they started going down rapidly, reaching a low of 478 in April 2009. The amount of new constructions has been on the rise since then, but it has yet to recover to where it was before the Great Recession.
The current state of the economy is also adding complexity. As mortgage rates and inflation rose, the purchasing power of would-be buyers declined. Mortgage firm Approved Funding’s president and chief lending officer, Shmuel Shayowitz, says that when interest rates hit 6%, many would-be purchasers momentarily paused their search. We noticed a more significant turning point at 7% when individuals fled the market in droves.
In addition, homeowners are reluctant to sell due to rising mortgage rates since they want to avoid losing their current, low-interest rates. “Many homeowners with mortgages are currently locked in at sub-5 per cent interest rates,” says Sean Roberts, CEO of homebuilding platform Villa and strategic advisor at real estate website Orchard. Many potential sellers are instead staying in their houses, reducing the supply of current properties on the market.
What is a reasonable stockpile size?
According to conventional belief, there must be at least five to six months’ worth of housing stock on the market to be considered neutral. The National Association of Realtors report on home sales shows that the housing supply remained the same in February and March 2023, at 2.6 months’ worth. This is better than January’s record low of 1.6 months but is still significantly below equilibrium.
Popular areas can attract new inhabitants faster than new homes can be built to accommodate them, compounding the issue. In over 150 metro regions, the NAR’s Housing Shortage Tracker compares the number of new housing permits issued to the number of new jobs produced, consult with realtors in Raleigh, NC.
The effects of a shortage of available homes on the market
Buyers and sellers are both affected by the shortage of available homes. Many would-be sellers are reluctant to put their homes on the market because of the high cost of a new home with today’s mortgage rates. Therefore, many people who want to sell their homes to downsize, upgrade, or relocate are holding off. This prevents those houses from being included in the market supply.
However, customers are going to shoulder most of the issue. There is intense competition for a limited number of homes since the supply needs to be improved. This causes bidding wars, which raises the house’s price. Because sellers can pick and choose which interested parties are willing to accept any terms they set, this situation often leaves purchasers with little leverage and fewer rights in the transaction.
When will we see an end to this shortage?
The current housing scarcity is expected to last for some time due to the situation’s complexity. Even if interest rates were lowered, that wouldn’t end the problem. A rise in the number of houses being constructed would also be helpful. However, builders may still hesitate to begin new projects due to the pandemic’s high material costs and labour shortages.
“It could take a while for the U.S. to recover from the current housing shortage,” Roberts adds. Houses are expensive and time-consuming to construct, and additional variables must be considered. There is no quick fix, unfortunately.
In summary
The housing crisis that the country is currently experiencing has multiple causes, the most notable of which are the pandemic, inflation, and rising interest rates. However, at its core, this is a supply-and-demand issue: After the Great Recession, a dramatic reduction occurred in building new homes, and it has yet to recover fully.
