How did we get here?
This situation isn’t just pandemic-related — we started 2020 with record-low
inventory, and it’s only dropped from there. In fact, the inventory crisis has been
a decade in the making, driven by five major trends that are unlikely to change
anytime soon:
1. Low-interest rates
It might be counterintuitive, but ultra-cheap money is a driver of both increased
demand and decreased supply. When rates are this low, it becomes very
inexpensive to keep my first property for investment income when I buy a new
home rather than selling.
This phenomenon of homeowners doubling up, buying but not selling, coupled
with big institutional investment in single-family rental properties over the past
decade, is the reason that there over 7 million previously resalable properties
that have now shifted into the rental market.
As long as rates stay low, this will continue. The only time in the decade we saw
inventory climb year over year was when mortgage spiked rates from 3.7 percent
to 4.8 percent in the latter half of 2018.
2. ‘Buy low, sell never’
During the past decade, just as real estate holding costs plummeted, income on
properties climbed. Innovations like Airbnb combined with an explosion of
alternate dwelling units (ADUs) meant that single-family homes are much more
likely to generate positive cash flow than ever before. It’s been an excellent
decade to own real estate.
3. Underbuilding
The hangover from the bubble burst 12 years ago meant that homebuilders built
about half as many homes for most of the past decade and are only now
reaching long-term normal construction levels. This phenomenon limited the
growth of housing supply, exacerbating the effect of low-interest rates on existing
supply.
Underbuilding has led to an ironic twist in the market: some sellers are afraid
to list their homes because there’s nothing to buy. The cycle perpetuates.
4. Demographics
We’re now well into the millennial era — there are more millennials than any
other generation, and this crowd is coming into its peak years for earning and
homebuying.
We have a solid five to 10 years of millennial demand in front of us. At the same
time, boomers have had inexpensive mortgages for years, and they’ve held on to
Will low inventory plus high demand snowball this winter?
What’s in store for 2021?
Home price growth reaches high unseen
5. Homeowner-focused policy
The CARES Act foreclosure moratorium has kept some properties from coming
to market, staying instead in the hands of distressed owners. But the foreclosure
pipeline was already at record lows before the pandemic hit, and Americans
have gained a trillion dollars of home equity since then.
As a result, pandemic-distressed homeowners seem unlikely to add to our
inventory any time soon. Although there are still 2.5 million homeowners in the
mortgage forbearance program, many of whom have not made a mortgage
payment in a year, these homeowners have gained significant equity wealth in
that time.
People default on a loan when the deal is not worth saving, or they’re upside
down on the value. Very few people are facing that situation this time around.
The fact is that policymakers have been focused on keeping people in their
homes. Essentially all U.S. housing policy, whether tax, mortgage markets or
pandemic-related, is aimed at helping people who already own their home, often
to the detriment of new buyers.
What will help us emerge from the crisis?
The most important factor is mortgage rates. As rates fluctuate over time, look to
a 3.5 percent threshold where consumers start feeling the pinch of higher
payments. This will change the calculus of what they buy and also what they
hold onto or sell to finance the new move.
New-home construction is also finally climbing and will begin to add a little to the
market. More construction will be critical for boomers to move into retirement
and millennials to get their first homes.
We also really need to change the focus of policy from homeowner-centric to
housing market-centric. Loosening policy on foreclosures and construction would
help, as would more flexible property tax rates that would keep fewer people
locked into low-tax basis properties.
The good news is that in this crisis, Americans have gained trillions in wealth.
Even those most tragically affected have been able to stay in their homes and
benefit from large increases in equity. And there’s still tremendous demand
waiting to be unlocked — if we can create the conditions to do so.