Inventory Crisis or Start of the New Normal?
We have all heard talk about a housing inventory “crisis” which is speaking to the lack of homes available for sale. Buyers are paying historically high prices for homes, sellers are selling their homes quickly, and for a premium. A metric historically used to measure the supply of homes and, ultimately, provide a temperature for a particular market is Months of inventory (MOI). This metric measures the rate at which the housing supply is consumed. A balanced market is one with 6 months of inventory available. A buyers market is a market with greater than 7 months of inventory and a seller’s market is 5 months of inventory or less. In Louisville, our MOI numbers have been steadily between 2 and 3 months since 2016. Historically, this indicates a very strong seller’s market with rising prices.
What troubles me is the focus on supply. We call this an inventory crisis. Is it? Are there fewer homes being listed and sold in Louisville? An inventory crisis would certainly imply the number of homes listed and sold is either flat, declining, or, at a minimum, failing to keep up with normal increases in demand each year. Right? What I sought out to find in listing and sales data is a decline in the number of homes listed and a decline in the number of homes sold. Surprisingly, I found quite the opposite in the Greater Louisville market.
In Louisville over the last 5 years, a new record was set for the number of homes sold in a year. This is with a slight exception from 2018 to 2019 the number of listed homes sold declined by an insignificant 106 homes. In 2018 and 2019, the rate of homes sold versus the homes listed was 64%. In other words, 64 out of 100 homes listed were sold in those years. From 2000 through 2005 39-45 of 100 homes listed were sold. In 2019 there were approximately 27,000 homes listed in Greater Louisville and 17,925 of those listed homes were sold. Compared to 2000, 24,000 homes were listed and 10,330 homes were sold. There is a relatively flat increase in the number of homes listed over 20 years but there is still a trend of increasing supply over 20 years. The most significant change is the percentage of homes listed that are selling. More focus needs to be given to the change in demand rather than the supply of housing.
The recession of 2008 and 2009 dramatically impacted the real estate markets across the country and this includes Louisville. The recession occurred when the largest generation since the Baby Boomers would normally be entering the housing market. Effectively, the recession caused a significant percentage of this generation to wait to enter the housing market. It wasn’t until 2014 when you really started to see significant demand increases from millennials and that trend of increased generational demand is still a statistically significant driver of buyer demand in markets across the United States. Normal housing demand plus the increase in millennial demand helped the housing market to rebound and we have seen steady growth in home values and purchases for the majority of the last decade because of this. But with this increase in demand, are we in an inventory crisis?
What I have found to be overlooked and not considered in the analysis of the absorption of real estate is the foundational shifts in the use of technology in real estate consumption. In 2000, the way buyers and sellers found each other was profoundly different than the way they find one another in 2020. In 2000 agents were critical to the dissemination of information and availability of housing inventory. Associations, brokers, and agents had a firm hold on the information required by consumers to purchase real estate. Over the last 10 years, we have seen the firm hold of information shifts to the consumers. Online services like Zillow started gaining significant popularity around 2011. Zillow and other significant web-based real estate platforms are data companies at their core. They ultimately have changed the way prospective home buyers approach the market. The first showings of a home used to be when a buyer physically visited a home. Arguably, now the first showing of a home is online. Each home listed receives exponentially more views than ever before. Buyers can explore more neighborhoods, view more homes, attain more critical data, and engage in a home search aggressively online before ever setting foot in a property. Why does this matter? One of the most significant metrics I observed from this analysis is the steady decline in the time on the market over the last 20 years. The time on the market from 2000 to 2019 dropped more than 50% from an average of 95 days on the market to an average of 42 days. Part of this is likely due to an increase in demand but, this is primarily driven by how technology has changed how we consume real estate.
20 years ago, buying real estate was more time consuming and people dependent. Today, real estate consumption remains time-consuming and people dependent but the process of finding real estate has been made dramatically more efficient than it was 20 years ago. Sellers are able to gain more exposure to their listings and buyers are able to see dramatically more properties given the tools and resources available online. The market we are experiencing in Louisville is impacted more by changes in demand than a lack of supply. Sure, there could be more homes for sale, but we will see absorption rates of listed properties remain closer to 60% and the time it takes to find buyers will be forever reduced given the changes in how real estate is consumed.
I don’t believe we have an inventory “crisis” in Louisville. Hindsight will show us we have been experiencing what will be the new normal of real estate supply and demand. We have a slight shortage of supply and are experiencing dramatic changes in the manner and speed of which real estate is consumed.