Will an inventory shortage stymie spring? Look to 1994 for clues

This is the second part in a multistory series on the spring housing market and what different chapters from history might tell us about the present. Read Part 1 here, and check back Friday for the next installment. Also, join us from Aug. 8-10 for Inman Connect Las Vegas, where we’ll discuss how the spring played out. 

Earlier this month, on the first day of spring, Inman’s editorial staff hit the phones.

Over the course of a single morning, reporters reached out to more than a dozen real estate agents across the country to find out what was happening in their markets as the spring began. And the responses were nearly unanimous: Things were busy. One agent even compared current conditions to 2021, which of course was a banner year for the housing business.

While not entirely surprising, the consensus among the agents is at least curious; as Inman reported earlier this week, both historical data and contemporary analysis suggest this spring should actually be slower than usual, not busier. Inflation, high rates, fears of a recession and affordability challenges are simply not a recipe for a bustling spring.

But as it turns out, these two realities are not mutually exclusive. And there’s one word that explains what’s going on: Inventory.

More specifically, inventory is low. And it has been for a long time now. What results is a simple balance of supply and demand. Without a lot of homes for sale, buyers are competing more fiercely for what remains and the agents helping them are busier than ever.

This is fairly standard stuff for anyone who has been watching the real estate industry over the past few years. But in an effort to understand what might happen in the near future, and as part of the ongoing “Past is Prologue” series, Inman combed through historical data on inventory.

And that takeaway is that even if low inventory makes competition more intense, overall it doesn’t necessarily mean that home sales will fall off a cliff. In some cases, sales have even ticked up as inventory dipped.

The point then is that while this spring is likely to be difficult due to low supply, as well as issues with high rates and inflation, current inventory shortages by themselves do not automatically have to translate to cataclysmically low sales.

When inventory drops

The National Association of Realtors (NAR) provided Inman with single-family inventory data going all the way back to 1982. The data, which is plotted in the graph below, shows the rise and fall of various economic cycles over the years. But the thing that most stands out from looking at the numbers in this format is just how bad the inventory situation was coming into 2023 (the graph displays numbers through January of this year).

Since the beginning of the year inventory has ticked up as homes sit on the market longer, according to a recent report from Realtor.com. Inventory in February was up 67.8 percent compared to the same period in 2022, the report specifically notes. That means there were “234,000 more homes available to buy this past month compared to one year ago,” the report reads.

That sounds like a lot, but even with this uptick inventory remains 47.4 percent lower than it was before the pandemic. And of course, as the graph above illustrates, the years immediately preceding the pandemic were already characterized by low inventory — meaning that in the grand scheme the supply of homes right now really is uniquely low.

Because the present is genuinely unprecedented, it’s difficult to precisely extrapolate the future based on the past. But one of the closest distant analogs to the present is perhaps 1994, when inventory of single-family homes dropped to just 1.38 million. That was the lowest that inventory dipped in either the 1980s or 1990s. In fact, inventory wouldn’t get that low again until December 2017, when there were just 1.29 million homes for sale.

Inventory in the early- to mid-1990s followed a seasonal pattern, but the downward trajectory that led to 1994 began in earnest in the late 1980s. So, between the high point in May 1988 and the low point at the end of 1994, inventory fell 51.6 percent. If we want to exclude the effects of seasonality and instead look at May 1994, inventory fell 40.4 percent during that period.

But NAR’s data also shows that the number of monthly home sales actually went up 4.5 percent from May 1988 to May 1994. If we end at the low point of December 1994, home sales fell 2.5 percent — a dip that is far smaller than the reduction in inventory.

Something similar happened in the period after the Great Recession as housing recovered from the downturn. From 2010 to 2019, inventory of single-family homes fell 46.5 percent. But over that same period, monthly sales of single-family homes actually rose 50.2 percent.

Unsurprisingly, prices also continued rising during this period, growing 57.7 percent between 2010 and 2019.

And of course, there are the COVID-19 pandemic years. From May 2020 to May 2022, inventory of single-family homes fell 25 percent. But sales during that period climbed 28.6 percent.

The key takeaway here is that over the long run inventory can, evidently, fall quite significantly without dragging the number of home sales all the way down with it. Yes, fewer homes may in some cases sell when there’s less inventory. But generally speaking, home sales in prior periods have tended to be fairly resilient relative to supply fluctuations.

These findings make sense in light of Inman’s recent report on agents’ springtime activity; buyers are apparently still out there and the homes that do hit the market are selling.

Of course, the present is characterized by a unique mix of high prices, rates and inflation in addition to inventory challenges. And the past isn’t a perfect analog to the present. But it should at least give agents some solace to know that there are multiple historical periods in which inventory fell but where sales kept chugging along.

Buyers are hurting

Economic experts who spoke to Inman for this series were generally in agreement that the spring is likely to be slower this year compared to the recent past, thanks in part to both shortages in supply and other factors, such as affordability.

But Hannah Jones — an economic research analyst with Realtor.com — noted that buyers, in particular, are likely to be the ones hurting this spring.

“The big piece of that is we’re seeing a lot fewer new listings, we’re seeing a lot fewer sellers choosing to list their homes for sale,” Jones told Inman. “Inventory is up but new listings are down so buyers are seeing a lot less new activity.”

In other words, the pool of buyers is competing for fewer homes. And Jones added that “a lot of sellers are also buyers,” meaning that at a time of atypically high mortgage rates, there’s continued pressure on homeowners to stay out of the game.

The good news for buyers, Jones said, is that inventory is going up, offering relief in certain markets. For instance, in cities such as Austin and Las Vegas — which were especially popular during the pandemic — inventory has now risen above pre-pandemic levels, according to Realtor.com data. Price growth has slowed and price reductions are becoming more common, the data further shows. That matters because Jones described affordability as one of the main obstacles for consumers in today’s housing market.

But even with improvement on some fronts, the near-term inventory problems in the U.S. housing market are not likely to turn around in a single season. Daryl Fairweather, chief economist for Redfin, agrees that buyers are facing inventory challenges, but pointed out that this has been going on for nearly a decade.

“We’ve been dealing with this problem probably since 2014, 2015 and it just keeps getting worse every year,” she explained.

The problem is a result of numerous factors. Members of the now-aging baby boomer generation own a large share of the housing supply but also have significant equity and little need to sell. At the same time, millennials and Gen Z — both large generations — are reaching prime homebuying age, meaning there’s significant competition across generations for properties.

On top of that, and more fundamentally, the U.S. has failed for many years to build enough housing to keep up with demand. New home construction has been accelerating in recent years, including during the pandemic, but dipped again last year as the economic situation soured — meaning the U.S. hasn’t yet built its way out of the housing shortage.

Even an economic downturn may not significantly change the inventory landscape. Matthew Gardner, chief economist for Windermere Real Estate, told Inman he believes a recession is possible later in 2023, suggesting such a downturn might resemble what happened in 1990. But he noted that recessions don’t necessarily increase the supply of homes.

“In the 1990 recession did we see a massive jump in inventory? No we did not,” Gardner said. “From July of 1990 to March of 1991, inventory dropped.”

Moving costs money — which for many people is in short supply during downturns, Gardner went on to point out.

“If we’re in an economic contraction or decline, are we going to move? No we’re not,” Gardner explained.

What all of this means is that year-over-year fluctuations aside, the broader inventory squeeze that has dominated the housing market for the last decade is unlikely to meaningfully abate in the immediate future. Supply will stay low this spring.

But the good news is that the historical data mentioned above indicates that lower inventory doesn’t mean deals don’t happen. As many newer agents learned during the pandemic, it simply means a more competitive experience.

A slower spring

Industry leaders in the trenches are experiencing this weird and unusual set of circumstances first hand. Tiffany McQuaid, broker-owner of McQuaid & Company in Naples, Florida, told Inman that “we’re usually super, super busy at this time of year.”

“We’re very thankful that we are busy,” she explained. “But it’s different than normal. We’re busy, but not as busy as normal.”

McQuaid said that concerns about the banking industry may keep people on the sidelines in her market this spring, and that snowbirds — the older seasonal migrants that make up a significant portion of the market in Naples — are sticking around in their properties later in the year, meaning fewer such homes are likely to hit the market. And of course, homeowners with mortgages won’t want to lose their low rates this spring.

“I suspect we’re also going to be plagued with kind of a wait-and-see type of buyer,” McQuaid speculated about the coming months.

Such comments echo those of other industry professionals who have recently spoken about facing a busy market, albeit one with fewer available houses than might be ideal.

Dave Jones, owner-operator of Windermere Abode in Tacoma, Washington, mentioned that something similar is happening in his area.

“We saw an uptick in activity just like in any other cycle,” he told Inman, “but it definitely is down. Year over year we’re down, but month over month we’re up.”

Jones went on to say that the Tacoma area currently has less than a month of inventory — far below the six months that have historically been considered “balanced” — though sellers have recently lost some of their leverage compared to the recent past.

Additionally, homes that are well-prepared for the market or located in desirable areas are selling quickly.

Either way, though, Jones said that “we haven’t seen this type of market before.” The comment effectively sums up the lessons from the current and historical numbers on how much inventory is available and what it means for the coming months.

“It’s not,” Jones added, “by any stretch of the imagination a normal spring market.”

Email Jim Dalrymple II