It’s no secret that the lack of housing stock is a major contributor to the insane price hikes in the current housing market. There are many ways to measure housing stock, and pretty much all of them say the same thing.
Between last year’s new build delays, people unwilling to sell their homes due to a pandemic, foreclosure moratoriums, and people who don’t want to get into the crazy buyers market after their home is sold, there are very few homes in the market.
While several factors are driving the recent spending spree (demand and low interest rates are the biggest drivers), we are unlikely to return to a more stable housing market with a healthier rate of growth without inventory rebounding.
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Assessment of the current situation
When could the inventory recover? I’ve pulled in data from Advance Guide, a national real estate brokerage company, and I will be using Active Listings as the primary metric for inventory forecasting. Active listings basically means the total number of real estate listings that were active in a given month.
We’ll be looking at the rest of 2021 to help investors develop their own strategy for managing and growing their portfolios. As you can see from the following graphic, the listings have actually decreased significantly compared to 2020.
In general, when preparing to forecast a time series (a set of data over time), you look for some patterns right off the bat.
- Trend: is the data generally moving up or down?
- Seasonality: Does the data follow a repeatable pattern over a period of time?
- Cyclicality: Is the data going through less predictable cycles of highs and lows?
With our eyes we can see that this data has both a negative trend and an annual seasonality.
It’s not huge, but you can see that Active Listings have been going down slightly over the past few years. So when we talk about the “rebound” in inventory I’m talking about going back to 2019 levels (or even slightly below).
The second thing to note in these graphs is the consistent seasonality in the data.
Seasonality doesn’t really have anything to do with the seasons. It just means that you will see the same pattern in the data over a period of time. For our analysis we see the annual seasonality: the pattern of peaks and valleys is very similar every year. Active listings are lower in the first and fourth quarters and higher in the second and third quarters.
Because of this seasonality, the first step in inventory forecasting is to forecast what will happen to inventory this year if the seasonal pattern is maintained and nothing else happens. In other words, based on what we know about January-April 2021, what would history happen to us in May-December?
I made a seasonal index and projected just that. You can see the projected numbers in green below.
It doesn’t look great. As expected, we see inventories rise in the summer months and fall again towards the end of the year – but we’re not really going to get to the pre-pandemic point.
In normal times, this type of prediction might be sufficient. I would use our trend and seasonality and a few fancy statistical models to forecast inventory for the future.
But we’re not in normal times, and unfortunately, all of the fancy tricks I’ve learned don’t work here. Mathematical models require data from which the model can learn, and I am not aware of any data that can teach us about the present moment. Instead, we need to use some intuition about the housing market to predict what might happen next.
To do this, I’ll include three other factors in the forecast: new build, improved sales conditions, and foreclosure stocks.
Last year was a strange year for new builds. At the beginning of 2020, construction activity was at its highest level since the financial crisis. It then quickly plummeted to 2014 levels when the COVID-19 pandemic hit, according to MacroTrends.net.
On average, it takes around eight months for an apartment to come onto the market. By April 2021, we should have overcome the end of housing starts at the beginning of the pandemic.
On the other hand, we have not yet seen the housing start inventory hit the market in the second half of 2020. This gives me reason to believe that new builds could add inventory to our seasonal forecast.
There were approximately 1.37 million housing starts in August 2020, all of which should have hit the market by April 2021, the last month we have data for. However, there were 1.73 million housing starts in March 2021 – 360,000 more than in August last year. That means that in eight months we will be bringing a relatively large number of new builds onto the market.
As the pandemic progressed, governments have put protective measures in place to limit foreclosures. This has resulted in an all-time low in foreclosure activities.
But that doesn’t tell the whole story. Millions of Americans are still in forbearance programs, which means they are working with their lenders to temporarily delay or reduce mortgage payments. What happens when the foreclosure moratoria ends is still unclear, but personally I am not too concerned about a foreclosure crisis.
If you look at the data, the number of borrowers in the deferral has steadily decreased. As early as March 2020, it was estimated that around 8% of all borrowers were lenient. This number has shrunk to 5.5% at the end of 2020 and is now around 4.2%. That means an estimated 2.1 million borrowers are still on guard.
Does that mean that 2.1 million people are about to be foreclosed? I do not think so. According to the Mortgage Bankers Association, approximately 87% of people on deferral have left their deferral arrangements with an existing repayment plan and their loans have resumed.
This is excellent news as the number of homeowners facing impending foreclosure isn’t that high. It looks like these forbearance programs worked.
But there could still be an increase in foreclosures if the moratorium is lifted. Assuming that 13% of those 2.1 million deferred borrowers will leave the deferral without an agreement with their lender, we will have approximately 273,000 loans with potential foreclosure.
Certainly not all of these loans will actually face foreclosure, but I’ll use a high estimate of 90% for this exercise. That gives us 246,000 potential foreclosures. Since I have no idea of the timing of these potential foreclosures, I’ll be distributing them evenly from July to December in my forecast. Hopefully the actual number of foreclosures will be much lower.
Conditions of Sale
The final factor I’ll include in my forecast is improved sales conditions, which are by far the most difficult to quantify and venture into the guesswork territory.
What I want to do is quantify an improvement in a homeowner’s willingness to sell. Intuitively, it makes sense that people wouldn’t want to sell their homes during a pandemic. We also know that many were afraid to sell because they didn’t want to become buyers in this crazy market.
But I have to think that will change and some recent data confirms me. In a recent poll, the number of people who said it was a good time to sell rose from 61% to 67%.
With no further data to quantify this effect, I modeled a 6% increase above our seasonal expectations from May to July and 8% from August to December 2021.
I just increased it to 8% because of a hunch. It’s not really scientific. I actually think it could speed up faster, but I don’t have any other data to back it up so I’ll stick with the numbers I have.
When I combine all of these factors, I get a forecast for 2021 that looks like this.
I’ve broken out every factor in the graph so you can see where some of the bumps are coming from. My gut feeling tells me that improved sales terms will rise faster, but I’ll stick to the data I have now. You can also see from this graph that even if I’m wrong and more homeowners are facing foreclosure, it doesn’t have much of an impact on the overall inventory.
In a historical context, my model shows that we are approaching 2020 inventories in the summer and even exceed the 2020 numbers towards the end of the year. This forecast does not assume that inventory levels in 2021 will come very close to pre-pandemic levels.
What really drives the stock is the number of existing properties that have been brought to market (not new builds). Hopefully my forecast for improved sales conditions is too conservative and is accelerating faster, so inventory recovers faster than shown here.
What will happen after 2021 is even less clear. Housing starts remain a big question mark. There may be a slowdown in construction starts given the high prices of lumber and other materials. This could definitely reduce inventory, even if improved sales conditions continue to improve, I suspect.