Here’s why we can have record sales but low housing inventory

Much is discussed about the record low housing inventory in today’s market. But, there are homes to sell. Here’s the explanation.

It’s projected that 7.1 million homes will be sold in the U.S. in 2021, up from 6.5 million last year. Just as impressive is that Redfin forecasts a record-setting $2.53 trillion worth of homes will be sold this year.

“The U.S. housing market has undergone a meteoric rise during the coronavirus pandemic, fueled by record-low mortgage rates and a wave of migration made possible by remote work,” Redfin observes.

But how is the torrid pace of home sales possible as housing inventories sit at or near rock-bottom levels, with only a 4.4-month supply recorded across the U.S. in April?

Low housing inventory is somewhat deceptive

Jeff Hefel, managing broker of Ruhl&Ruhl Realtors in Dubuque, Iowa, and Galena, Illinois, explained that any housing inventory figure is deceptive.

“That is standing inventory, and nothing stands on the market too long,” Hefel said. “Listings are coming on regularly, but are selling so quickly that a market snapshot at any point will show a low inventory compared to the total number of listings, including pending sales.”

“The standing inventory is low and home sales are high because homes are leaving the market at essentially the same pace they are coming on the market,” he added.

Similarly, Patrick Conner, president of London Properties in Fresno, California, said he’s adopted the mindset that inventory is not low — there’s just not much standing inventory. California’s Central Valley recently had anywhere from a 0.8-month to one-month supply of homes, he said.

Stop focusing on inventory

York Baur, CEO of Seattle-based real estate technology provider MoxiWorks, believes the industry focuses too much on inventory figures. Inventory, he said, “is simply the momentary level of the reservoir” and fails to take sales velocity into consideration. He prefers to think of the current scenario as a listing shortage rather than an inventory shortage.

“Markets are ultimately efficient. We tend to get lost in diving down in rabbit holes about ‘why’ and ‘what,’ but fundamentally, it’s driven by supply and demand,” Baur said. “Fundamentally, supply-and-demand economics will balance things out. Yes, it’s a little weird right now, but this too shall pass.”

Do off-market listing play a role?

So, how is the sales-versus-inventory equation being affected by off-market “pocket” listings? Very little.

For the one-year period ended in March, pocket listings made up just 3% of sales, according to Redfin data cited by The Wall Street Journal. That’s up from 2.6% at the same time in 2020 and 2.5% at the same time in 2019. Baur called that “a rounding error” when stacked up against the overall market.

Hefel said that in California’s Central Valley, a “still small, but unusually high, number of deals are happening outside the MLS, with people literally just putting a cheap for-sale sign in the yard and selling the first day.”

Regardless of how the homes are being sold, they’re going fast and there is low housing inventory, but there are homes to sell.

The median number of days on the market for the 133 home listings sold in April in the Central Valley stood at three, according to Hefel. In Conner’s territory, the average number of days on the market was 18.

“We have anywhere from three to 12 offers on listings, with offer prices going anywhere from $2,000 to $45,000 over asking,” Hefel said.

And, for now, it appears that housing inventory will remain low, at least for a bit, according to Zillow.

There were signs in March that the years-long, virtually uninterrupted nationwide decline in inventory may have begun turning a corner. But rather than making gains in April, the inventory deficit appears to have deepened slightly instead — total U.S. inventory was down 30.3% from April 2020 and 1.4% from March, from 30% year-over-year and 0.8% monthly declines in March. In some large markets, including Raleigh (-54%), Cleveland (-50%) and Providence (-45%), there were roughly half as many (or fewer) homes on the market this April compared to last. Even so, the past two monthly declines are much shallower than the month-month declines registered in January and February, and we may be seeing a period in which inventory declines simply level off for a while before we see meaningful increases. A majority of experts recently surveyed by Zillow said they expect inventory to begin growing again in the second half of this year or early 2022. And like March, the national picture obscures some encouraging local trends. Inventory was up in April from March in 29 of the nation’s 50 largest markets, and was flat in a 30th market. Compared to a year ago, inventory was up in three large markets: San Jose (+37%), San Francisco (+32%) and Seattle (+3%).

—Zillow April Market Report

As we head into the summer moving season, we expect inventory to increase slowly.