There’s no question about it, the operative theme of the 2013 housing market is restricted supply. Ever since the bubble burst in 2006, we’ve been hearing about the dangers of over supply, of the massive “shadow inventory” out there. Yet we’re living in a vastly different reality. There are 40% fewer homes on the market now than there have been during February in the last few years.
Altos 20-city (national) composite. Data as of February 22, 2013. Source: Altos Research
You can boil the low-inventory reality down to three primary factors:
Under-Construction
Since 2007, new housing starts have been anemic. The long-term average construction rates are about 1.5MM homes per year. In the last six years, we’ve averaged well under 1MM. And since 2009, the average is closer to 500,000. Meanwhile population and household formation keeps on trucking. The over-construction that happened in the bubble is a distant memory. Expect this trend to continue for several more years. It’s difficult to ramp up housing production quickly. And we’re a long way below normal.
Altos 20-city (national) composite. Data as of January, 2013. Source Census Bureau
The Reverse Shadow Inventory Dynamic
Rising home prices have led to fewer, not more, existing homes coming on the market. You might call this, ironically, the “Reverse Shadow Inventory” dynamic.
When the Shadow Inventory meme emerged during the bubble, the bearish argument followed: As soon as home price tick back up, there are going to be millions of people (and banks) who want to unload. Therefore supply will rise and prices will fall again.
In actuality, it seems the psychology has been reversed: As prices have climbed, those who (still) own their underwater homes finally see light at the end of the tunnel. The longer they hold, the closer they are to recovery.
Banks are acting similarly. The owners of underwater mortgages have no incentive to unload quickly. Their assets are appreciating. Furthermore, as home prices increase, fewer and fewer people are at risk of default. The Shadow is shrinking in the noon-day sunshine of rapidly re-inflating home values.
Government Policy
It is no coincidence that essentially all housing policy, all programs, laws, and incentives have been focused on stimulating demand and restricting supply. The Fed is aggressively keeping interest rates low.
We’re in a hangover of short supply after the burst bubble. Low new construction, low incentive for existing homes to sell, and a government that wants people to stay put.