Forecast: Housing Industry Nuclear Winter
It’s pretty simple really. If people don’t move, our industries will be blown up – and the forecast for movers, buyers and sellers this winter looks terrible.
Today, it’s a sellers’ market and consumers have been devouring homes. Yet nationwide, sellers have had cold feet about putting their home on the market for a variety of reasons. This is an ongoing trend that’s getting worse. As recently as the year 2000, 15% of the population moved each year. Twenty years later, the percentage of movers has been reduced an astonishing ⅓ down to 9.8%…. And that was before Covid came to town.
Concerns over Covid have placed the already cool housing supply into the icebox. So just how cold is this real estate winter going to be and what can we learn from the past to improve our future?
How is the Market?
I spoke with my friend Mike Simonson, CEO of Altos Research, as I was curious about the condition of the market. Altos does awesome reports on the strength and conditions of the market for your zip code, so he knows where we stand. Mike shared with me that as of Friday, total Single Family Residential listings are down 41% year over year. A drop of this magnitude is unheard of, ground-breaking territory (currently there are only 573,000 SFR active listings in the US). This low inventory is cause for significant alarm.
What business model can sustain a reduction in supply of greater than 40% without serious disruption?
Surprisingly, home sales are on fire, up 10% y/y. That hot market is causing a major smoke screen, keeping us from seeing the underlying problem. And the hot sales are a trend that illustrates there will be further depletion of the available housing stock. (ie: more people are buying up the remaining inventory)
Seasonally, we tend to see the number of listings, home sales and traffic on search sites wane at the end of summer. However, summer is over, and sales momentum and search traffic has not yet started to slow – indicating stronger than normal demand.
Very High Demand
Realtor.com posted astonishingly high record traffic numbers in July. RDC’s Marci James shared with me that 92 Million unique potential movers searched frivolously for their next home. This is a quantum leap up 26% from last year then record setting numbers, and just an astonishingly high amount of demand.
Realtor.com also reports that nationally, average days on market is down 8% y/y nationally to 56 days. Average price has increased 10% y/y to $350k. As a homeowner, that’s exciting – but as an industry, we ought to be concerned.
If current trends persist, one can imagine that there will not be enough housing stock to go around. LO’s and Realtors will be fighting for seller leads in the streets. In the near future (winter 2020/21), it is likely that agents will be looking for work elsewhere, while LO’s hang on to a more than solid refi market.
Growth of Rent
Renting is by far out pacing home ownership in growth recently. On average two thirds of households are owned, while one third are rentals nationwide. However, increasingly, some cities are seeing rent explode, and have greater than 50% of households as renters.
Affordability of housing is key. Relative to earnings, the cost of rent is lower than that of buying. Rent is on the increase nationally 36% over 10 years (or 3.6% y/y avg). This year, it’s not keeping pace with the 8% y/y increase in the cost of buying due to demand driven property value increase. Buying is becoming even more unaffordable for first time buyers.
This despite record low mortgage rates. And, in case you missed it, those low rates will remain for some time as the Fed announced last week that they will likely keep rates low until 2023. Unlike the 1980’s and 90’s, mortgage rates are not prohibiting the American Dream – purchase price is.
First Time Homeowners
Millennial first time home buyers continue to be perceived as if it/they were an untapped reserve of buyers and this could further exacerbate our supply situation. So just how many buyers are in that segment?
Currently the millennial homeownership rate has grown to 43%, still well below the rates of generation X (67%) and the baby boomer and silent generations (77%) via apartmentlist.com This population is craving additional supply and lower prices.
In 2019, there were 128.58 million households in the United States. So while the percentage of movers is dropping, there were an additional 7.6 million new households created over the past decade, and that seems like a lot at first glance.
However, 760K households coming online each year is only ½ of 1% of the total households in the US.
Making matters worse, barely any of those new households were owner occupied – while renter new households increased 10% in the same time period. Now more than ever, new households are opting to rent, rather than buy. This trend pushes down the number of mortgages and sales that are available for the industry.
There are over 2 million active real estate agents in the US, and typically they do 5.5 million transactions per year. If supply continues to be 40% below normal, or if it drops even further – there will have to be adjustments that will be proportionate to the workforce.
So at this point, winter looks pretty tough. The outlook is bleak.
It’s not just Real Estate and Mortgage companies. Home improvement stores, consumer package goods, cable and satellite carriers, mattress and furniture companies… they all are focused on movers and they all are built up to service the 5.5 million annual home sales. If no one is willing or desires to list their home, and there is not enough new construction, all these industries will be severely impacted by a lack of movers.
If you Build It, They will Come
How do we begin to satisfy this immense demand in a record setting housing shortage? The obvious solution is to build more supply, or find more sellers. The United States needs a building spree the likes of which we’ve not seen since after WWII. 1.290 million housing units were started in 2019, up 3.2% compared to 2018, yet here we sit, lacking supply and run away rising cost – especially for starter homes. (source CNBC)
Facing rising prices and a lack of inventory, Tokyo was forced to take drastic measures in the last 20 years – with great success they were able to influence price stabilization and increase supply.
This is not a pleasant outcome, but looking at the data, I feel its my responsibility to share. If there are no listings, the real estate machine will face a melt down. Today, the market remains red hot as summer and unfortunately, many of the people in the industry are celebrating, oblivious to the fact that leads will run dry, that they are standing on ground zero as the supply bomb has already been dropped.
Now is the time to innovate because an entirely different and very cold reality faces us this winter.