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What’s driving the real estate inventory crisis?

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Even with the pandemic, demand for homes continues to skyrocket and prices continue to rise. There simply haven’t been enough homes available to keep up with demand. We are down to just one-third of the normal level. In fact, the inventory crisis has been a decade in the making, driven by a few major trends.

When interest rates are as low as they have been it becomes very inexpensive for someone to keep their first property for investment income rather than sell it. Low interest rates coupled with soaring rental prices sets up the ideal scenario for an investor. Innovations like Airbnb combined with an explosion of accessory dwelling units (ADUs) means 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.

Homebuilders have been building about half as many homes for most of the past decade and are only now reaching long-term normal construction levels. Just as construction strides are ramping up, we are seeing builders reign back a bit due to limited supply of building materials. For example, Builders are faced with the difficult decision to pay triple the cost for lumber and pass the costs onto the consumer; or slow down building until supplies and costs return to more-normal levels. Neither option doesn’t fair well for the consumer.

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 home buying. At the same time, boomers are holding on to their homes much longer than previous generations. Many homeowners are willing to downsize but they are afraid. They are scared of selling without having suitable replacement housing. As boomers age into retirement home ages, some will elect to stay in their homes and have health care services brought to the home rather than risk a retirement home where Covid-19 was most deadly.

What will help us emerge from the crisis?

We need policy that will support smart development. The current administration’s CARES Act foreclosure moratorium has kept pandemic-distressed homeowners in their homes. 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. Essentially all U.S. housing policy, whether tax, mortgage markets or pandemic-related, is aimed at helping people who already own their home not creating new home options.

With lumber prices settling down and other building supplies catching up to demand, we should continue to see development. More high density construction will be critical for boomers to move into retirement and millennials to get their first homes.

The good news is that in this crisis, even those most tragically affected homeowners 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.

·      Reference. Inman News, contributor Michael Simonsen, Altos Research