The Inventory Crisis

Over the past few months, there hasn't been a morning that my notifications weren't filled with headlines talking about the real estate inventory crisis. I can't even escape hearing about it while mindlessly scrolling through TikTok!

But, while we are all well aware of the crisis, understanding why it is happening isn't as clear, even to those in the real estate industry. So I figured I'd try to summarize my thoughts on what is happening in “this crazy real estate market!”.

The Perfect Storm

There isn't just one factor that created the situation we are experiencing. It is more of a “perfect storm” of multiple scenarios playing out at the same time. Below are, in my opinion, some of the biggest culprits

• A Lack of New Home Construction - After the financial crisis hit over a decade ago, new home construction all but stopped. The stoppage resulted in many laborers leaving the country or switching careers, leaving the construction industry perpetually playing catch-up.
• Those Damn Millennials (I can say that because technically I am one!) - Danielle Hale, chief economist at realtor.com, explained that “The largest chunk of the millennial generation is hitting 30”. More and more of the largest generation since the baby boomers are now in the market to purchase a home which has added additional strain on supply.
• Low-Interest Rates - Over the past year, we've seen rates drop to levels we've never experienced before. These rates have dramatically increased buyers' purchasing power, which caused many to get off the fence and into the market before rates go back up.
• The Pandemic - The pandemic has contributed multiple factors to the inventory shortage. The most impactful being:
  • A Rise in Lumber Costs - Another headline you might have seen lately is the incredible rise in lumber costs (Don't worry, there is a TikTok video for this too). So far, since the beginning of the pandemic, lumber prices have risen 130 percent! This increase makes for an estimated $24,000 difference in the cost of new construction homes.
    • Why the rise in prices? According to David Logan, a senior economist with the National Association of Home Builders, manufacturers anticipated a “precipitous drop in housing demand” due to the pandemic, which didn't happen. Simultaneously, lumber supply chains, like pretty much every other supply chain in the world, were disrupted, which created even more delays. Couple this with the fact that the number of home renovation and DIY projects increased dramatically during the pandemic, and you have another perfect storm.
  • Demand for More Space - The work from home movement has caused many people to rethink their living situation. Many of those living in condos or smaller starter homes soon felt like they needed to find a place with additional square footage and outdoor space if they would be spending more time there.
  • More Disposable Income - Even though thousands of people lost their jobs due to the pandemic, many white-collar workers did fine. In many cases, they had more disposable income than in pre-pandemic times. This additional income has allowed many to “get into the market” earlier than expected.

How/When Will It End?

The fact is, we either need an increase in the supply of homes for sale or a decrease in demand from buyers. A couple of ways this could happen are by:

• Increasing New Construction - We need more new construction to happen, but the rising costs associated with building now make this problematic. Additionally, homes aren't built overnight, so even if costs came down, it would take months, and more likely years, to produce enough supply to change things.
• Increasing Interest Rates - Interest rates have made it incredibly attractive to purchase real estate over the past year. When rates eventually creep higher, affordability becomes an issue. Fewer people can afford a $750,000 home at a 4% interest rate vs. a 3% interest rate, thus reducing demand.

Either way, this won't be something that ends overnight but instead will be a gradual change over the next 12-24 months that eventually gets us back to a more balanced market.