Real estate market: Reasons for recent home inventory crunch

There are 20 percent fewer homes listed for sale in July 2023 compared to last year, according to Realtor.com. Realtor.com Chief Economist Danielle Hale joins Yahoo Finance Live to discuss the reasons for the housing supply crunch and how buyers and sellers can capitalize in the current housing market.

Video Transcript

- Well, the inventory crunch in the housing market getting worse last month. New data from realtor.com shows there are 20% fewer homes newly listed up for sale in July compared to last year. Danielle Hale is chief economist at realtor.com, joining us now. Danielle, you know, Danny just talking about that 5% rate which is kind of the tipping point that gets sellers or potential sellers off the sideline. I mean, what are other factors that you're finding that's really adding to that supply crunch?

DANIELLE HALE: I think the mortgage rate lock in effect is a big one, but it plays into this overall affordability picture. So we look at the number of homes that are on the market right now. It's down. But then if we look at the number of homes that we've built over the last decade, it's really trailed the number of households that have created. The most recent data from the census, the housing vacancy survey, showed that homeowner vacancy is at a record low of 0.7%. There just aren't a lot of homes that are out there sitting empty, unused.

And when you don't have slack in a market, which is very much the case in the housing market right now, you tend to see a lot of upward price pressure. And that's a challenge when mortgage rates are back getting close to long term highs, close to 7% again, because already, prices are high. Borrowing costs are high. There's not a lot of affordability for buyers. And a lot of potential sellers are going to turn around and buy. So what's a problem for those buyers is also something that factors into a lot of seller decisions as well.

- So Danielle, Diane here. So you're not winning if you're a seller. You're not winning if you're a buyer. Who's the winner in all this?

DANIELLE HALE: Yeah. I mean, I think people who can manage to find a new home that fits their needs, it's in their budget, it's not easy, but it can be done. And those are people who can win. There are some advantages for buyers right now. The fact that there aren't a lot of homes for sale is not one of them. But there's less competition in the market right now because not everyone can navigate these higher home prices and higher mortgage rates.

Another opportunity is for very equity or cash rich buyers. They tend to be older buyers, maybe baby boomers who are looking to downsize. Especially if they're considering downsizing from an expensive market to a lower cost market, they have some flexibility right now and a market that's less competitive than it has been over the past couple of years.

So even though it's a challenging market, home shoppers do have some means of navigating it. And we're seeing this in our data. Our cross market demand data shows that a record high number of people are looking for a home in a market other than where they live.

So we think affordability is driving a lot of that trend, especially when you consider that the biggest areas where people are looking for homes elsewhere are in the west, and then the fastest growing region for people who are shopping elsewhere is the northeast. Those are also very high cost markets. So people who are in high cost markets are looking for homes elsewhere, really trying to capitalize on affordability.

- I mean, does that suggest further migration then as a result of affordability if you're looking at a market outside of where you are right now because you can't buy a house there.

DANIELLE HALE: Potentially, what I think is interesting. So we're measuring this as a share of the market. And so while the absolute numbers of people moving far away may actually be lower because we have seen fewer home sales this year, and we expect to see you know a 10 year low in home sales in 2023 as a whole, they are an increasing share of the market.

So the people who are moving right now are the people who have that flexibility to maybe relocate, or maybe they're at that retirement stage in their life where they don't need to stay tied to their current location and their current job. And so they're willing to relocate.

I think it's very surprising in light of the fact that we're seeing a lot of return to office behavior increase, and so greater demands on workers to be in the office. In spite of that, we're still seeing a lot of cross market shopping. We think affordability is driving that. In fact, in research with the Wall Street Journal, we found that markets in the midwest are topping those areas where housing markets are still good. We're still seeing price growth. Quality of life indicators are good. People are trying to have their home and be able to afford it, and affordable areas continue to pop to the top of our list.

- Danielle going back to that supply crunch, what we have seen is that's led to a big uptick in construction. We saw that reflected for example most recently in those numbers we got out from Caterpillar. At what point does that construction, supply coming online catch up to the demand and the supply that's needed?

DANIELLE HALE: Yeah. I think just understanding the magnitude of the problem. Depending on the assumptions you make about multifamily construction and single family construction, you can get anywhere from an estimate of like 2 to 6 million homes that we're short. And for context, we build about 1, 1.5 million homes a year. So it's a huge hole.

Even if all we did was build to fill the gap that exists, we're looking at a 2 to 5-year problem. And that's not considering all those new households that are formed. So there is a lot of opportunity for construction, and I think that's going to continue over the next several years.

Fortunately, if you look at multifamily construction in particular, the number of multifamily units under construction right now is at a record high. So there is some relief on the way for renters and apartment dwellers. And single family construction has been relatively high. Not at the peak of its range. But it could stand to benefit from some more construction as well.

- It is incredible to think that 2 to 6 million lag. That is a long time until we kind of see the catch up there. Danielle Hale, it's good to talk to you today, the chief economist at realtor.com.