Summary: The United States continues to experience a housing market inventory shortage that has increased demand among home buyers in cities across the country. Real estate market inventory levels are not as low as they were in the midst of the COVID pandemic, when home-buying activity surged nationwide. But they’re still very low from a historical standpoint and have declined further in 2023.
The U.S. continues to suffer from a housing market inventory shortage in 2023, and many analysts believe those conditions will stretch into 2024 as well. In short, there aren’t nearly enough homes listed for sale to satisfy the level of demand from home buyers across the U.S.
Of course, real estate conditions can vary from one city, metro area, or region to the next. And this applies to inventory levels as well. Some cities have a fair amount of housing market supply in 2023, while others are experiencing record low levels.
But overall, the U.S. real estate market continues to deal with very low supply levels, and it presents a series of challenges for home buyers.
This report examines the history of the current housing market shortage, how it changed before and after the COVID pandemic, and how it’s affecting other aspects of the real estate market including home prices.
Update: You’ll find some additional predictions for the housing market in my latest report, published in late-October 2023. It offers an outlook for inventory, mortgage rates, and home prices.
Housing Market Inventory Shortage: A Brief Look Back
The current housing market inventory shortage affecting the United States was many years in the making. We’ll get to the overlapping reasons for the current shortage in a moment. But first, let’s look at how supply levels have changed over the past decade or so.
The above chart shows the median “months of supply” in the U.S., going back to 2012.
Months of supply (MOS) is a metric used to describe inventory levels within the real estate market. It indicates how long it would take to deplete the current inventory of homes for sale if no new properties were added to the market. The MOS is calculated by dividing the number of homes currently for sale by the average number sold each month.
A lower number indicates there are fewer homes listed for sale, while a higher number means there is more supply available for buyers. When the MOS gets very low, we tend to experience “seller’s market” conditions in which buyers have to compete fiercely for limited inventory.
Lower supply levels also tend to put upward pressure on home prices.
According to the National Association of Realtors: “Historically, six months of supply is associated with moderate price appreciation, and a lower level of months’ supply tends to push prices up more rapidly.”
Supply Trends Worth Noting
Here are some important trends and transitions to notice in the above chart:
- First of all, you can see how housing market inventory in the U.S. has been (mostly) trending downward for the past decade.
- You can also see the “COVID effect” that started during the second half of 2020. During the pandemic, supply levels plummeted due to a nationwide migratory shift and home-buying surge.
- The next big shift began in 2022, when housing market inventory levels began to climb steadily again. This was due to a nationwide cooling trend, during which buyer demand declined in response to sky-high home prices.
- The next significant change began in early 2023. You’ll notice how inventory has been dropping since the start of this year, creating new challenges for home buyers across the U.S.
And that brings us up to the present. When this report was published, in late summer 2023, supply levels were still falling.
According to an August 2023 report from Realtor.com:
“The U.S. housing inventory crunch accelerated in July as active listings growth slowed for the fourth month in a row and fell below year ago levels (-6.4%) for the first time since April 2022…”
The authors explained that home buyers across the U.S. had fewer homes to choose from in July of this year, when active real estate listings were “49.2% below typical pre-pandemic July levels.”
Some Markets Doing Better Than Others
But not all housing markets are “shrinking.” Some U.S. metros bucked the national trend and experienced an increase in real estate listings over the past year. They were led by New Orleans (+39.6%), San Antonio (+34.5%) and Memphis, Tenn. (+33.2%).
Nationally speaking, however, the housing market inventory shortage continues to worsen in 2023. And this has made things more competitive for home buyers all across the U.S.
What’s Causing the Ongoing Inventory Shortage?
A lack of new home construction contributed to the real estate supply shortage in the United States, and more than any other factor. The short version is that there are more and more Americans who need homes, but not enough construction to meet that demand. But there are other contributing factors as well.
Here are the top three reasons why the United States continues to experience a serious housing market inventory shortage in 2023:
1. Not enough new-home construction
The United States has been under-building homes for years, and that trend accelerated during the pandemic. The COVID-19 pandemic caused a number of disruptions to the construction industry, including supply chain disruptions, labor shortages, and rising material costs. As a result, the number of new homes being built fell to its lowest level in decades.
Additionally, the population has more than doubled since 1950, from 150 million to 330 million. This means that there are now 2.8 times as many people who need homes. People are also living longer these days, which means they’re staying in their homes for longer periods of time.
“If the population is going to grow and the pace of homebuilding is insufficient for that growth, then there’s going to be a housing shortage,” says Robert Dietz, chief economist for the National Association of Home Builders. “You’d have to be building more than 1.1 million homes a year to meaningfully reduce the deficit.”
This lack of new-home construction has led to a shortage of inventory on the market, which has driven up prices. In some parts of the U.S., there are only a few months’ worth of homes on the market. That means buyers are competing fiercely for a limited number of properties.
2. Pandemic-fueled home buying surge
The pandemic also led to a surge in home buying, as many people were looking for more space to work from home and raise families. This surge in demand worsened a pre-existing housing market inventory shortage by depleting the number of homes for sale.
3. Mortgage rate lock-in effect
Today’s higher mortgage rates are making homeowners with lower rates reluctant to sell. Many homeowners who locked in low rates during the pandemic are now hesitant to sell their homes and buy another one (with a much higher interest rate). That’s because they would have to pay a significant amount more each month on their mortgage payments, going forward.
In other words, they would knowingly increase their monthly housing costs by selling their homes. And as recent surveys have shown, many homeowners are simply unwilling to do that. This so-called “lock-in effect” has contributed to the current housing market inventory shortage in the U.S., and it could carry drag that shortage into 2024 as well.
What’s the Outlook for 2024?
While no one can predict future real estate market trends with complete accuracy, it seems likely that the current supply challenges within the real estate market will continue through this year and into next.
In a July 2023 press release, Fannie Mae’s chief economist Doug Duncan wrote:
“We began discussing our expectations of a supply shortage in late 2014, and it remains front and center in the housing market in 2023. The supply of existing homes is near the 2009 crisis low, and it’s showing no signs of easing. This puts the onus on homebuilders…”
Similarly, a July 2023 report from Realtor.com stated:
“The nation is in the clutches of the largest housing shortage it’s ever experienced — and there’s no relief on the horizon.”
These two voices are part of a growing chorus that expect the low-supply situation to persist for the foreseeable future. The bottom line is that anyone planning to buy a home during the latter part of 2023 or in 2024 should expect stiff competition from other buyers.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author