Why is housing inventory so low? Understanding the U.S. housing shortage
Key takeaways
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The housing shortage is essentially a problem of supply and demand: There is not enough housing supply to meet the demand of those who want to buy.
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The pandemic, inflation and rising interest rates have all contributed to the shortage.
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New home construction dropped precipitously after the Great Recession, and it has yet to fully recover.
The housing shortage is probably not news to anyone who’s looked to buy a home recently. According to the National Association of Realtors (NAR), the supply of homes for sale in the U.S. — typically measured in months of housing supply — reached a record low of just 1.6 months in January 2022. And while that number has grown since, the supply is still not nearly enough to meet the demand.
Insufficient inventory may be obvious to house-hunters, but it’s a complex problem with no obvious solution. Here’s what to know about the U.S. housing shortage, what factors have caused it and how it impacts the overall real estate market.
Why is there a housing shortage?
Rising materials costs, supply chain issues and labor shortages stemming from COVID all negatively impacted housing inventory. But the problem actually existed long before the pandemic: Essentially, the U.S. has failed to keep up with the housing demands of a continually increasing population. (Particularly when it comes to millennials, a huge demographic who are now at prime homebuying age.)
One factor that exacerbates the shortage is the activity of institutional investors, who buy up housing inventory to flip or rent out for profit. Large investors purchased more than 8 percent of homes on the market as recently as December 2022 — the highest December share of investors on record, according to a 2023 report from Realtor.com. That removes those units from the pool of availability for individual buyers.
Another factor is the Great Recession, which took place around 2007–2008 but whose effects are still being felt today. Data from the St. Louis Fed suggests that this had a severe impact on housing inventory: New home builds had been on the rise in 2005, peaking in January 2006 with more than 2,200 housing units started that month. They then declined very sharply, hitting a low of just 478 in April 2009. The total number of new builds has been slowly increasing since then, reaching 1,521 units as of February 2024, but homebuilding totals have yet to catch up to pre–Great Recession levels.
The current interest-rate environment is also complicating matters. Hopeful buyers saw their purchasing power plummet as mortgage rates increased in late 2023 to their highest point in more than 20 years. “When rates hit 6 percent, we saw many aspiring homebuyers put their search on hold temporarily,” says Shmuel Shayowitz, president and chief lending officer of mortgage lender Approved Funding. “At 7 percent, we saw a bigger tipping point where people exited the market en masse.” The average 30-year fixed rate was 7.39 percent as of May 1, according to Bankrate’s weekly survey of large lenders.