Last December I wrote Some thoughts on Housing Inventory. We are seeing record low inventory almost everywhere, and here are some updates to that previous post.
The key for housing in 2021 will be inventory. If inventory stays extremely low, there will be more housing starts and a larger increase in house prices. However, if inventory increases significantly, there will be fewer starts and less price appreciation. So what will happen with inventory in 2021?
Click on graph for larger image.
This graph, based on data from the National Association of Realtors® (NAR), shows nationwide inventory for existing homes.
According to the NAR, inventory was at 1.04 million in January. This was the lowest level on record for the month of January.
Inventory had steadily decreased following the housing bust, and seemed to mostly level out in 2017 through 2019. Then inventory really declined in 2020.
Prior to 2020, two of the key reasons inventory was low:
1) A large number of single family home and condos were converted to rental units. In 2015, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors. Most of these rental conversions were at the lower end, and that limited the supply for first time buyers.
2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80). The leading edge of the boomers are now turning 77 or so, and the boomers selling will probably gradually increase over the next 10 years.
In 2020, inventory really declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities).
NOTE: This graph is updated using the Vintage 2019 estimates. IMPORTANT NOTE: Housing economist Tom Lawler has pointed out some issues with Census estimates, see: Lawler: The Dismal Demographics of 2020
See my post Demographics: Renting vs. Owning from a couple of weeks ago.
This graph is from 1990 to 2060 (all data from BLS: current to 2060 is projected).
We can see the surge in the 20 to 29 age group (red). Once this group exceeded the peak in earlier periods, there was an increase in apartment construction. This age group peaked in 2018 / 2019 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak around 2023. This suggests demand for apartments will soften somewhat.
For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior). The population in this age group is increasing, and will increase significantly over the next decade.
Demographics is now positive for home buying, and this is a key reason I expected the increase in single family housing starts in 2020.
Note: Based on Lawler’s work, I expect some downward revisions to the prime population following the 2020 Census (lower immigration, more prime age deaths). But the general story will remain the same.
First, making the assumption that the pandemic will be mostly over by mid-2021, we can make a few general predictions:
1. Potential sellers will be more willing to list their homes (and allow strangers into their homes).
2. The move away from dense cities will slow and maybe end. What makes cities attractive (jobs, cultural events and other entertainment), hasn’t been available during the pandemic. That will change when the pandemic ends, and cities will be attractive again. Of course, the trends toward remote working, online shopping and home entertainment will likely continue, and this will allow some people to live anywhere.