The average time someone spends in a home has increased from 8.7 years in 2010 to over 13 years in 2020; a whopping 50% increase. How is this impacting house prices? What caused the “break” in the game of musical chairs leading to the inventory shortage? How are rising interest rates impacting values and supply? Will the inventory shortage due to lack of people moving get solved anytime soon?
Homeowners staying in their residences longer is contributing to the worsening shortage of homes on the market. The 1.28 million homes for sale at the end of November was down 22% from November 2019, according to the National Association of Realtors, and inventory sits near its lowest level in decades.
What was in the data?
The length of time U.S. homeowners stay put has been rising steadily, a big reason why the inventory of homes for sale is at record lows and prices are near all-time highs. The typical homeowner in 2020 had remained in place for 13 years, up slightly from 12.8 years in 2019 and well ahead of 2010’s reading of 8.7 years, according to a new analysis by real-estate brokerage Redfin Corp. About one in four U.S. homeowners has lived in the same home for more than 20 years, the study showed.
Essentially the “game of musical chairs” where someone sells a house and buys another one has decreased substantially as people are staying in their homes 50% longer. Without movement in the housing market, supply has been further reduced.
How should a normal housing market operate?
In a typical market buyer purchase a “starter home” like a condo, townhome, or smaller single family. They then will “trade-up” to a larger home when they have children or because of covid now work from home.
The cycle repeats again in the inverse, after children leave the home and/or people retire they “trade down” to a smaller place. Somewhere along the line this cycle has broken! There are two major causes of this “break”.
What caused the “break” in the game of musical chairs?
There are three major changes in the market that have disrupted the typical real estate cycle of upsizing and downsizing.
- Lack of inventory: It is the old chicken before the egg adage where the lack of inventory is driving people to stay put. Many prospective purchasers are worried about finding an appropriate replacement property and are therefore hesitant to list their house. Instead of “moving up” many are opting to remodel/add on to make their current home fit their needs as they are unable to locate a suitable property due to the lack of inventory.
- Aging in place: Many older homeowners are opting to stay in their current properties due to covid. There is an increasing apprehension for elderly about being in a high-density environment (like a condo) and therefore they are opting to stay put in their house and update to allow them to age in place.
- Interest rates: The rising interest rates are creating an interesting twist on peoples ability to move. As rates have risen close to 50% from just a year ago, many borrowers have locked in at the once in a lifetime low rates for 30 years. As rates increase, their payments will be substantially higher sue to increased rates and furthermore increased prices for the property they are purchasing. You will begin to see a whole group of buyers that will not move for a very long time due to their low rate mortgage.
Will this inventory cycle get corrected & when?
In the short term, I don’t see the game of musical chairs coming back like before anytime soon especially in desirable markets like Denver. For example in Denver and many other “hot” markets prices have gone up so much that it is very difficult to find a suitable replacement property at the right price. Furthermore with higher prices, payments are even more expensive due to increased interest rates which further reduces inventory. I don’t see this trend reversing anytime soon.
In the long term, eventually the seniors will “age” out of their homes which will free up inventory, but I’m not sure this will be enough to solve the huge shortage of inventory. It will help, but will not be enough to get the market moving again in regards to inventory.
Summary
The inventory shortage has been years in the making with substantial pullback in building after the 08 crisis that has never fully recovered. Couple the lack of building with increasing prices along with interest rates and the inventory shortage becomes self-perpetuating as both move up buyers and seniors stay put ironically due to the lack of inventory. Until there is meaningful new construction bringing considerable supply online in the cities with the most demand the chicken and egg paradox will not get solved.
Unfortunately, the cities with the most demand are also the cities with the least amount of room left to build along with expensive building costs which will greatly limit the amount of new inventory. Long and short, look for prices to continue to rise in high demand areas due to the lack of inventory or is it the lack of people moving?
Additional reading/resources
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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