The surge in housing demand in 2020 and 2021 was so substantial that Federal Reserve researchers estimate that housing supply would have needed to increase by a staggering 300% in order to match the pandemic’s housing demand surge. This surge was primarily propelled by the shift to remote work and the household formation boom triggered by the separation of roommates seeking greater space. At the peak of the Pandemic Housing Boom, only 546,151 homes were available for sale on Realtor.com in July 2021, a sharp decline from the 1,239,298 homes on the market in July 2019.
That housing demand boom was ultimately subdued by last year’s mortgage rate shock, which pushed the average 30-year fixed mortgage rate from a 3 handle to a 7 handle.
Did inventory surge back due to the impact of spiked mortgage rates? Not really, at least nationally. While the number of active listings for sale in July 2023 (646,698 homes) is 18% higher than levels in July 2021 (546,151 homes), it remains significantly lower, by 48%, compared to the pre-pandemic levels recorded in July 2019 (1,239,298).
Why hasn’t housing inventory for sale/active listings soared back to pre-pandemic levels given the ongoing housing affordability shock? There are two primary reasons.
Firstly, from an aggregate perspective, U.S. homeowners find themselves in a robust financial position, with mortgage debt payments accounting for only 3.9% of U.S. disposable income in the first quarter of 2023. This stands in stark contrast to the 7.2% recorded at the peak of the housing bubble in the fourth quarter of 2007. This absence of financial strain, combined with the ongoing strength of the labor market—marked by a mere 3.5% jobless rate—results in a housing market characterized by a scarcity of “forced sellers” and a low occurrence of foreclosures.
Secondly, the phenomenon known as the “lock-in effect” has resulted in a significant reduction in the number of U.S. homes being placed on the market. This can be attributed to the rational decision-making of move-up buyers, who find it economically disadvantageous to sell their current homes, relinquishing their favorable 2% or 3% mortgage rates, only to acquire a new property with a higher 6% or 7% interest rate. This reluctance among sellers has led to a noteworthy decline in “new listings,” plummeting from 520,516 in July 2021 to a mere 374,028 in July 2023. That seller strike, and the dearth of new listings, presents a challenge for the ascent of active listings and the overall inventory count.
Among the nation’s 200 largest housing markets tracked by Realtor.com (see the searchable chart above), 193 markets had inventory levels in July 2023 that were below July 2019 levels. Only seven of those nation’s 200 largest housing markets are back to pre-pandemic levels. That includes Killeen-Temple, Texas; Lubbock, Texas; Kennewick-Richland, Wash.; Waco, Texas; Austin-Round Rock-Georgetown, Texas; Huntsville, Ala.; and Beaumont-Port Arthur, Texas.
Those seven markets, for the most part, have both a higher concentration of home building activity (i.e. higher levels of supply coming onto the market) while they also saw bigger than average demand pullbacks during last year’s mortgage rate shock.
It’s no surprise that Austin—arguably the epicenter of the bifurcated pandemic housing correction—has seen a sharper tick up in inventory. The Pandemic Housing Boom was particularly fierce in the Austin market, where local prices soared 63% between March 2020 and May 2022. That home price jump, coupled with last year’s mortgage rate shock, simply pushed Austin home prices too far beyond fundamentals, thus spurring a home price correction.
That’s starkly different from what a Northeast market like Hartford, Conn. is seeing. Hartford home prices did boom during the pandemic, however, its 37% jump between March 2020 and May 2022 was less dramatic than in Austin. That might explain why the mortgage rate shock hasn’t translated into a big inventory jump in Hartford—where inventory/active listings remains 79% below pre-pandemic levels.
The substantial increase in Austin inventory has coincided with a 10.2% decline in home prices, as tracked by Freddie Mac, within the market from June 2022 to June 2023. Conversely, the notable decrease in inventory in Hartford has aligned with a local surge in home prices, which rose by 8% between June 2022 and June 2023.
Simply put, “all real estate is local” and inventory trends matter.