Housing inventory has been in the news a lot lately. Search the term online, and you can find news articles from Minnesota, Utah, Tennessee, and Texas, among other places. Everyone is worried about housing inventory.
The stat shows how many houses are available for sale in a specific market. It can get as granular as a city or as macro as the whole U.S. How does it affect your real estate investments? Let's go over it.
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Supply and demand
Supply and demand drive the prices of everything. When supply goes up, prices go down. When demand goes up, prices go up, and vice versa. Supply and demand is the most basic economic tenet.
This tenet applies to the real estate market, too. When there are a ton of homes on the market (supply) and few buyers (demand), some sellers will accept lower prices to sell. When there aren't many homes on the market, but there are tons of buyers, buyers will bid prices up higher and higher.
Housing inventory is one way to measure the current supply in the country or a locality. There are a few good ways to measure housing inventory.
One is to use the National Association of Realtors' months' supply, which you can find on the St. Louis Fed website. An average number here is about six months. Anything significantly lower means there are more buyers than sellers and a shortage of available housing.
Another way, also on the St. Louis Fed site, is the monthly supply of new housing in the U.S. This one goes back to 1963, so you can play around with the chart to compare the current housing with the country's economic history.
What's the situation right now?
The current months' supply number is 2.2. This is well below 6 but up from a low of 1.6 in January. It has been under 3 for the entire two-year reporting period on the Fed's website. Compare that chart to the Fed's All Transactions House Prices Index for the same period -- it's like a rocket going straight up.
While the supply was relatively low, you'd expect housing prices to go up. Now that the supply index is increasing, can we expect prices to go down? We don't have Fed data to show that yet, but it is certainly likely. What caused the drop in supply and likely drop in prices? Rising rates.
As recently as February, the national average for a 30-year mortgage was a fixed rate below 4%. Now, the national average is 5.5%. Let's say you want to buy a $500,000 house -- that 1.5% increase in mortgage rate increases your payment by $458 per month. We're not too far removed from $458 per month being the entire mortgage payment for a condo.
What should I do?
Generally speaking, not much. Macro-economic stats like housing inventory are very useful for explaining what's going on, but for long-term investors, they are more of a sideshow than a key part of the analysis. It is useful to think about how you should invest in an oversupplied or undersupplied market.
Undersupplied markets usually lead to bidding wars. Here in Utah, it's not uncommon to hear about houses being sold with 15 or more bids for four figures more than the asking price. And it's been that way for over a year. That probably isn't the kind of market that lends itself to smart bargain buying, but it could be the kind of market you're looking for if you're ready to sell a property.
Oversupplied markets, on the other hand, could lead to a great buying opportunity. A seller who has been waiting months for a legitimate offer may finally decide to take your low-ball price. Also, as long as the population remains steady, oversupplied markets usually mean a lot of renters. The same number of people live in the area, but not as many are buying houses, so they have to live somewhere.
