Zillow’s Jeff Tucker on the impact of rising inventory.
The housing market is heading toward an inflection point — a rebalancing that will mean the end of the record-high price appreciation we’ve seen over the past year.
The relative pressure of supply vs. demand in the housing market is gauged by the level of active inventory. When demand stays higher than supply for a sustained period of time, the stock of homes available for sale gets depleted.
Like dropping barometric pressure, plunging inventory usually foretells stormy conditions: Faster price growth and faster sales. Those are exactly the conditions the housing market has experienced during the past year and a half.
Now, after months of plumbing record lows, inventory finally began to rise in March, and it looks likely that we’ll finally notch year-over-year growth sometime in 2022 — a milestone we haven’t seen since fall of 2019.
More inventory is both the consequence and cause of a more balanced housing market: More choice for home shoppers limits the number of buyers bidding on each home, and the added competition lights a competitive fire under sellers and their listing agents to make their homes shine, including by pricing it competitively. Inventory may rise enough later this year to slow the frenetic pace of the market (the median home seller accepted an offer in just 6 days in April).
But the market is so overheated right now that it will take some time to achieve this balance. At the pace it’s recovering now, inventory would take about 30 months – September 2024 – to reach pre-pandemic, 2019 levels.
If you trust the wisdom of crowds, check with the roughly 100 housing market experts surveyed by Zillow last quarter, who we challenged with this exact same question: 38% said they expected inventory to recover by the end of 2024, narrowly edging out 2023 (37%) as the most-cited year.
The important thing to remember is that this rebalancing in no way should cause worry about a crash. We’re talking about slowing persistent double-digit price growth to normal levels – not even prices falling, let alone tumbling.
Millions of Millennials entering their prime home buying years will keep demand high. It’s not even enough to cure our affordability crisis, as higher interest rates will keep homeownership costly, and prices will continue to go up.
In fact the expectation of another crash could contribute to keeping homes so unaffordable. Builders have been firing on all cylinders, and, with more homes under construction than any time since 1973, they understandably feel exposed in the event of a housing downturn.
If they trim their construction plans out of caution, we will miss out on one of the best hopes we have for net new inventory on the market, and the inventory crunch that’s helped push prices up will persist for longer than expected.
Jeff joined Zillow in March 2018 as an analyst on the economic research team, while completing his Ph.D. in economics at the University of Washington. He studies the causes and consequences of changing supply in the housing market. Prior to joining Zillow, he analyzed competition in markets from television to soda bottling as an economic consultant in merger review and antitrust litigation.