Seeds of a Housing Shortage

Sliding inventories and price increases could lead to overheated markets

November 1, 2012

The market is looking much improved today, with home sales and prices heading up. But within this improvement are the seeds of a long-term challenge: falling inventories.

The inventory of existing homes is at its lowest level in seven years, while newly constructed home inventory has hit a 50-year low mark. Falling inventory is causing home prices to shoot up higher and faster than most analysts anticipated. The national median price of transacted homes was up 9.5 percent in August. Other price measures, like Case-Shiller and the Federal Housing Finance Agency price index, which look at price changes in sales of the same properties over time, have been rising as well, at double-digit annualized rates in recent months. Of course, not all markets are this robust. Phoenix is looking to notch a 25 percent gain for the year, while Chicago is just emerging from negative territory.

As winter approaches, inventory will slide further. Few homes are newly listed after Thanksgiving. Historically, inventory tends to be 15 percent lower in winter than summer. Last year’s seasonal decline was even more dramatic, at 25 percent. We hope we won’t see an inventory decline of that magnitude this winter. Home values rising much faster than income growth will markedly cut into housing affordability.

But that may well be what’s in store. Distressed home listings will continue to fall because fewer borrowers are now seriously delinquent. Home construction is up, but only reaching half of the historic average of housing starts. Even the many pent-up sellers—those normal, nondistressed home owners who’ve been holding back for better market conditions—will not help the net inventory situation, because most of them will be selling to buy a trade-up property.

Slight seasonal relief should come in March, just as the spring buying season gets underway. But a deeper and longer-term issue to watch out for is the increasing possibility of a housing shortage across many parts of the country.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Lawrence Yun is chief economist and senior vice president of Research at the  National Association of REALTORS®. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1.1 million REALTOR® members. Dr. Yun creates NAR's forecasts and participates in many economic forecasting panels, including Blue Chip and the Harvard University Industrial Economist Council. He appears regularly on financial news outlets and is a frequent speaker at real estate conferences throughout the United States. USA Today recently listed him among the top 10 economic forecasters in the country.

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