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Monday, December 28, 2020

Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?

by Calculated Risk on 12/28/2020 02:14:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

9) Housing Inventory: Housing inventory decreased sharply in 2020 to record lows.  Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?

This might be one of the most important housing questions for 2021!

Tracking housing inventory is very helpful in understanding the housing market.  The plunge in inventory in 2011 (blue arrow on first graph below) helped me call the bottom for house prices in early 2012 (The Housing Bottom is Here).  And the increase in inventory in late 2005 (see red arrow) helped me call the top for house prices in 2006.

Back in 2019, when several commentators were bearish on housing, I pointed out there was no sharp increase in housing inventory (like in 2005), and that was one of the reasons I remained optimistic on housing and the economy (correctly!).

And the sharp decline in inventory during the pandemic (black arrow) was an indicator that price appreciation would increase - and that housing starts would pick up.

This graph shows nationwide inventory for existing homes through November 2020.

Existing Home Inventory NSAClick on graph for larger image.

According to the NAR, inventory decreased to 1.28 million in November from 1.42 million in October. And inventory in November was down from 1.64 million in November 2019.

Note that inventory was already pretty low in 2017, 2018 and 2019. Prior to 2020, two of the key reasons inventory was low:

1) A large number of single family home and condos were converted to rental units. In 2015, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors. Most of these rental conversions were at the lower end, and that limited the supply for first time buyers. 

2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80). The leading edge of the boomers are now turning 76 or so, and the boomers selling will probably gradually increase over the next 10 years.

Inventory is not seasonally adjusted, and usually inventory decreases from the seasonal high in mid-summer to the seasonal lows in December and January as sellers take their homes off the market for the holidays.

Year-over-year Inventory The second graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory was down 22% year-over-year in November compared to November 2019.  Months of supply decreased to 2.3 months in November (an all time low).

In 2020, inventory really declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities).

And at the same time, demographics are now favorable for home buying (a large cohort has moved into the peak home buying years).

First, making the assumption that the pandemic will be mostly over by mid-2021, we can make a few general predictions:

1. Potential sellers will be more willing to list their homes in the Summer and the second half of 2021 (and allow strangers into their homes).

2. The move away from dense cities will slow and maybe end. What makes cities attractive (jobs, cultural events and other entertainment), hasn't been available during the pandemic. That will change when the pandemic ends, and cities will be attractive again. Of course, the trends toward remote working, online shopping and home entertainment will likely continue, and this will allow some people to live anywhere.

3. Demographics will be favorable for home buying.  The generation moving into the home buying years is much larger than the leading edge of the boomers that will be downsizing - or moving into retirement communities.

4. Mortgage rates are probably close to a bottom now, but it seems unlikely rates will increase quickly with the Fed will be holding down rates for the foreseeable future.

5. Homebuilders will continue to respond to low inventories, and housing starts will likely increase further in 2021.

The bottom line is inventory will probably increase, especially in the 2nd half of 2021 (with the assumption that the pandemic will be mostly over by mid-year) - maybe back up to the 2017 - 2019 levels.   Inventory is always something to watch.  For example, if inventory increases sharply, house price growth will slow.

Here are the Ten Economic Questions for 2021 and a few predictions:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?