Housing inventory. It’s an interesting topic because it’s not the most intuitive thing for people to think about. I think it’s fair to say that the general public has a perception that our real estate market is “hot”. This term “hot” is not the most specific or nuanced descriptor of a real estate market, but I understand what people are referring to when they say it, and they’re correct. Home prices are rising dramatically. Over the past 5 years, along the I5 corridor, single-family residences have realized a 39% increase in value. This is an incredible statistic for homeowners, and while people in the industry have been saying it’s going to slow down ever since I got into the business, it hasn’t. The truth of the matter is there are a million reasons that account for this 39% increase. I’m not an economist so I can’t write intelligently about all of them; but I can write about one of the key factors, and that’s low inventory.
In order to preface this topic, we need to do a super quick history review of the past 15ish years. In the early to mid 2000’s anyone who could walk into a bank could get a loan for a house. Because anybody could get a loan, demand for homes surged due to new found buying power, and prices began to rise. In order to serve the house happy American consumers, builders started building houses everywhere and anywhere they could. So, people got loans and bought houses, got loans and bought houses, got loans and bought houses, and so on until 2007 when the inflation bubble burst and everything came crashing down. This was called the subprime mortgage crisis (google this for more detail, or watch the movie The Big Short, it’s awesome). With the burst of the housing bubble and the economy in recession, people found themselves living in homes that were worth less than what they owed, and builders found themselves building homes that were worth less than what they cost to build. Construction companies went out of business, people foreclosed on their homes, and the home buying halted, flooding the market with inventory.
Before I go further, you need to be aware of one very simple statistic, “months of inventory”. If there are 3 months of inventory, you can expect all homes currently for sale to be sold and off the market in 3 months. If there are 7 months, same thing. All active listings will be sold, on average, in 7 months. Months of Inventory is essentially the supply and demand axis that a real estate market hinges upon, and 6 months is equilibrium. If there are less than 6 months of inventory we are in a seller’s market, where the demand for homes is higher than supply. In a market with more than 6 months of inventory, it’s a buyer’s market with demand being less than supply.
Ok, back to the history. When the market got flooded with homes for sale, supply spiked dramatically higher than demand. In Thurston County, in January 2010, there were 11.6 months of inventory. Home buyers could take their time, go to every open house multiple times, and then submit a crazy low ball offer, and the seller would probably accept it because they had nothing else on the table. My how things have changed….
In January 2020, exactly 10 years since the peak of 11.6 months of inventory, Thurston County posted 0.7 months of active inventory for sale…. It’s insane! 10 years ago, it took 353 days for all active listings to sell. Today, if you go on Zillow and click around Thurston County looking at homes, don’t get too attached to any because they’ll all be gone in 21 days.
So, how can it be that our market is moving 16.5 times faster today than it was in 2010? Obviously, the answer to this question is extremely complicated, but I believe much of the cause can be boiled down into 3 main categories.
1) Where are the builders?
In 2007–2009, home builders were going out of business left and right. Large national companies had to restrict their operations, cut labor costs, and fight to survive the recession. Local building companies went out of business across the board, and general contractors who built a house or two a year could no longer afford to do so, and went back to doing repair work. With many construction jobs vanishing overnight, this labor force had to go get other jobs. So, where are the builders? They are now bankers, HVAC technicians, school teachers, all sorts of things, but their home building days are behind them. It is once again profitable to be building homes, but the labor just isn’t there to meet the demand.
2) The Northwest is trendy.
Over the last 10 years Washington State’s population has grown by over 800,000 with 76% (608,000) of that growth coming through migration. Washington is one of the nation’s hidden gems, and the word is getting out. Most of the 608,000 new Washingtonians are living along the I5 corridor, from Olympia to Bellingham. With a huge influx in population coming on the heels of a major recession that halted home building, standing inventory got bought up very quickly.
3) If I sell, where do I go?
To me, this is the most compelling of the three because I think every homeowner reading this can relate. Sure, you could list your home and sell it in 3 days, with 5 offers, for $10,000 over your asking price, but then what do you do? If there are only 275 homes for sale in the county what are the odds the kind of home you’re looking for is for sale? And if it is, most likely there are going to be 5 offers on it already. Most people aren’t willing to take that risk. They would rather stay in their homes, remodel, and not deal with it.
Considering these 3 factors, as well as many others that I’m not getting into, it’s the perfect storm for historically low inventory. I remember people telling me when I got into the business in 2017 that at 2 months of active inventory, it was the lowest they had ever seen. Looking back, the real estate market in the summer of 2017 was moving at a snail’s pace compared to today.
Who knows where inventory goes from here. At some point prices will have to stabilize and inventory will rise because we can’t go to zero. But when that happens? Who knows. And the factors that drive that change? Your guess is as good as mine.