The surge in housing demand in 2020 and 2021 was so substantial that Federal Reserve researchers estimate that housing supply would have needed to increase by a staggering 300% in order to match the pandemic's housing demand surge. This surge was primarily propelled by the shift to remote work and the household formation boom triggered by the separation of roommates seeking greater space. At the peak of the Pandemic Housing Boom, only 546,151 homes were available for sale on Realtor.com in July 2021, a sharp decline from the 1,239,298 homes on the market in July 2019.
That housing demand boom was ultimately subdued by last year's mortgage rate shock, which pushed the average 30-year fixed mortgage rate from a 3 handle to a 7 handle.
Did inventory surge back due to the impact of spiked mortgage rates? Not really, at least nationally. While the number of active listings for sale in July 2023 (646,698 homes) is 18% higher than levels in July 2021 (546,151 homes), it remains significantly lower, by 48%, compared to the pre-pandemic levels recorded in July 2019 (1,239,298).
Why hasn't housing inventory for sale/active listings soared back to pre-pandemic levels given the ongoing housing affordability shock? There are two primary reasons.
Firstly, from an aggregate perspective, U.S. homeowners find themselves in a robust financial position, with mortgage debt payments accounting for only 3.9% of U.S. disposable income in the first quarter of 2023. This stands in stark contrast to the 7.2% recorded at the peak of the housing bubble in the fourth quarter of 2007. This absence of financial strain, combined with the ongoing strength of the labor market—marked by a mere 3.5% jobless rate—results in a housing market characterized by a scarcity of "forced sellers" and a low occurrence of foreclosures.
Secondly, the phenomenon known as the "lock-in effect" has resulted in a significant reduction in the number of U.S. homes being placed on the market. This can be attributed to the rational decision-making of move-up buyers, who find it economically disadvantageous to sell their current homes, relinquishing their favorable 2% or 3% mortgage rates, only to acquire a new property with a higher 6% or 7% interest rate. This reluctance among sellers has led to a noteworthy decline in "new listings," plummeting from 520,516 in July 2021 to a mere 374,028 in July 2023. That seller strike, and the dearth of new listings, presents a challenge for the ascent of active listings and the overall inventory count.