Taking a Closer Look at the Inventory Crisis in Residential Housing

U.S. existing home sales, which comprise 85.8% of the national market, were selling at a robust 4.19 million annualized rate in March 2024. If current trends persist, over 4 million buyers and sellers will purchase a previously owned home in 2024!

The remaining +14.2% share of the U.S. housing market, comprised of newly constructed homes, were selling at an annualized pace of 693 thousand in March 2024, marking a 16.8% increase from their (June 2022) annualized sales pace! This positive trend suggests that the lack of inventory will not prevent close to 5 million people from buying a new or previously owned home this year! Although the United States faces a critical, well-documented national housing shortage of around 3.2 million units, many realtors, buyers, and sellers have continued to operate in this challenging environment! Except for an oversupply in local housing markets like New Orleans, Austin, Nashville, and recently, some cities in Florida, housing units remain in short supply.

De-Mystifying the Inventory Conundrum

Housing inventory is available; Houdini did not magically bring those 5 million homes into the market! In March 2024, 970,000 single-family homes were available for sale, which, according to the National Association of Realtors (NAR), accounted for 3.2 months of sales at the current sales pace. That headline figure is up from 860,000 in Dec. 2023.

Of course, we would be remiss if we didn’t mention that normal inventory levels equal 6.0 months of sales activity. So, at a reading of 3.2 months, inventories of previously owned houses are well below their historical norm, albeit nowhere near non-existent, as many have speculated.

Additional Evidence

Another widely followed survey, published by Realtor.com, strives to measure the number of outstanding listings (available for sale), net of duplicate entries. Using this metric, Realtor.com recorded 680.9 thousand outstanding listings in December 2022, 714.2 thousand in December 2023, and 734.3 thousand at the end of April 2024! The figures are non-zero and rising, further disproving the view that no inventory is available to interested buyers!

However, if homebuyers are concerned about the lack of inventory, visiting a New Home sales community may be a viable strategy! The supply of New Homes is hovering at an above-average reading of 8.3 months, well above their regular 6-month norm.

Of course, some will say this category is expensive and sold at a premium. According to data from the NAR and the U.S. Bureau of the Census, the median sales premium of a New versus Existing home averaged 20% from 1999 to 2023. However, in March 2024, data from these two organizations revealed that the median sales price premium plunged below that historical average to 9.5% due to an oversupply of New Homes and below-normal inventory levels for Existing Homes. In March 2004, the median sales price of a New and Existing home stood at $430,700 and $393,500, respectively!

Summary and Concluding Thoughts

Although our findings reveal that we continue to operate in an environment where the nation faces a housing shortage of about 3.2 million units, housing activity remains relatively vibrant. The Bureau of Economic Analysis reports that Residential Investment, a proxy for newly constructed housing, has registered positive seasonally adjusted annualized growth for three consecutive quarters (e.g., Q3:2023 +6.7%, Q4: 2023 +2.8% and Q1:2024 +13.9%), respectively! Not surprisingly, the inventory of New Homes is about 38% above its historical 6-month norm, while the inventory of Existing Homes hovers around 46% below its historical norm levels.

An important caveat is that our findings apply to the national housing market. Results in any Local or State housing market will vary. Below is a housing market tracker created by the NAR that highlights this phenomenon.

The NAR housing tracker's rule of thumb is that each Local and State housing market must create a new housing permit for every two jobs created to minimize the risk of housing shortages. Using this rule of thumb, the Aloha State (Hawaii) and Alaska face severe housing shortages. The chart below shows that many other Local housing markets have adequately increased the supply of housing units as the labor market has expanded in those markets.

Still, with total home sales running at an annualized pace of 5 million, one can safely conclude that the widely circulated view that nobody is buying houses due to a lack of inventory has been debunked as data from the NAR, the U.S. Census Bureau, and Realtor.com have shown that the national inventory of houses has increased over the past 12 months!