Is the Inventory Dam going to break? | Real Estate Supply and Demand

If you were intrigued by the title, I have a feeling that you also want to know something about the supply side of our real estate market. I’ve already talked about a lot of things on the demand side, such as competition, contingencies, and market updates from the buyer or consumer side. That is why I wanted to take a moment because I haven’t really addressed that real estate supply side yet, and it’s also a big part of the equation. It’s a big part of the conversation that we’re in here today, and there are really interesting stats, nationally and locally, that I think are all poignant to your real estate experience here in the East Bay.

 

To start, for any of us who has ever taken a high school or college level economics course, the first thing they teach you is that the supply and demand curves intersect at some point. That intersection is where a market should be at a given quantity and price. This time, let’s focus on the real estate supply curve.

The Real Estate Supply Curve

The first thing I want to talk about in this market update is jobs. As you can see from the graph, in California, we have gained back roughly half of the jobs that we lost during the COVID era, a significant gain in a very short amount of time. As things continue to open up, hopefully, by June 15, when the ban on masks and indoor limitations on capacity and such things come back, we hope a lot of those jobs will continue to come back as well.

1. There's a shortage of 5,526,525 homes from 2007 to 2020.

In 1959, the U.S. Census Bureau started recording housing stats. Then, during the 48 years that followed until 2006, 52,941,000 homes, or an average of just over 1.1 million homes per year, were constructed.

For the next 14 years, from 2007 to 2020, only 9.9 million homes, or roughly 708,000 homes per year, were built, leaving a nearly 400,000 home deficit yearly. These numbers mean we weren’t hitting that same level of construction post-economic and housing collapse in 2007, 2008. Most recently, in 2020, 990,000 instead of just 700,000+ homes were built, but this is still well below the 1.1 million running average from 1959 when they started recording this data.

 

So what does that mean? Well, it means we’re behind. It means that over the last 14 years, specifically, we have not built enough home inventory to keep up with demand. So what does that actually mean? Well, simply, it means that the real estate supply side is very low right now.

2. The millennial generation, the biggest generation since the baby boomers, has now decided to start buying homes.

But what about that demand? Simultaneous with this shortage built up over the last 14 years, the Millennial generation, the biggest generation since the Baby Boomers, has decided to start buying homes. They’ve shed some student debt. They’re starting to make money, starting to get out of their parent’s basements, and want to get out into their own space. As a result, that buyer pool is beginning to swell in a big way. However, because there’s not much new inventory having been added, there’s not a lot of homes for them to buy in the first place. So then that begs the question, why don’t we just start building homes?

 

Hypothetically, let’s say that you could start making up that deficit of roughly 400,000 homes per year. After that, you look at how many houses we’re behind from the last 14 years. Then, you project that forward, and let’s say we were able to make up for the deficit with that extra 400,000 homes per year. That would still put us 5.5 million units short over the last 14 years. Consequently, that would take, roughly speaking, 14 years to catch up, assuming we start adding 400,000 units across the country per year from now on. In other words, even though we can now meet that running average of 1.1 million every year starting today, we would still need to build more houses to fill up for the deficit we had for all the years from 2007 that we were not able to meet that average.

 

So those numbers don’t look particularly good relative to the real estate supply side.

 

At least not as much yet that would indicate that it could catch up with the demand side anytime soon. That only accounts for the new construction side. This situation is more evident in a place like the inner East Bay, San Francisco, or the peninsula, where there’s just not a lot of lands to be developed.  Unless people buy a property, tear it down, and build something brand new, there’s just not a lot of land to expand on here.

 

Therefore, if you’re not going to get a ton of new construction to balance out the real estate supply and demand, at least here locally, you might want to consider doing other things. One thing that comes to mind is to look at who’s owning and who might start to turn over the existing housing demand and the existing houses.

3. The Baby Boom generation comprises only 22% of the U.S. population but accounts for nearly 42% of homeowners nationwide.

The Baby Boom generation, who are now between ages 55 and 75, owns 42% of the existing single-family homes in the country. This is interesting for a couple of reasons.

 

First, how does a group of people, which is just a quarter of the population, own almost half of the inventory of single-family homes?

 

Well, homeownership was pushed big time during their lifetime. As a result, they invested, bought, rebuilt, and maybe some of them also kept rental properties or what have you.

 

The second reason is a lot of them haven’t moved out of those houses.

 

They’ve stayed put for a variety of reasons. Why is this is a significant trend to watch? It’s because, especially in the inner East Bay where you can’t easily start constructing something new from the ground, the age bracket and average lifespan of those belonging to this generation become something to watch.

 

Now, warning, this might get a little bit morbid, and I don’t mean it to be, but it’s just simply something to look at from the numbers perspective. When you look at the average life expectancy of Baby Boomers, men are expected to live for 76.1 years, while women are expected to live for 81.1 years. Remember, we’re just looking at it as numbers. And now that generation is starting to turn 75.

 

Thus, in theory, some people at the top end of that generation will either presumably move into assisted care or pass away. Then their properties and their houses will start to turn over presumably to either the open market or through inheritance to maybe their Millennial children. Right now, that’s all speculation, but we’ll see.

 

Nevertheless, that’s the situation we’re in as I see it right now. A large section of the single-family home inventory is currently controlled by a group of people which will likely start aging out of that inventory at some point in the not-so-distant future. Their needs are going to change. They’re going to pass away, or their health will deteriorate, or they’re going to move in with family, whatever the case is.

 

Either way, those units will start to change hands at some point.

 

And in an area like the Bay Area, that is something that you absolutely need to be aware of because it will change the dynamics of what is available on the market, when it would become available, and who’s going to be the buyer for it. That’s just the simple real estate supply and demand curve we’re talking about.

4. The likelihood that you're going to see a lot of foreclosures, REOs, and short sales this year is very unlikely.

Now one other thing which I’ve done a ton of different videos on is the foreclosure moratorium. Nationally speaking, many people have been getting behind on their mortgages and forbearances.  They have been trying to figure something out on how to pay out those payments they haven’t been making. However, the likelihood that you’re going to see a lot of foreclosures, REO, or short sales, etc., hit the market this year is very, very unlikely. It is because the foreclosure forbearance has been pushed out to the end of the year, plus the fact that it takes months or even years to get through an entire foreclosure process.

 

Probably by the 1st or 2nd quarter of 2022, I would expect that’s the earliest when you might see that first push of REOs and short sales start to hit the market. I looked at some stats from the California Association of Realtors last week. The assumption is there will be tens of thousands of units, as opposed to hundreds of thousands, coming on to the market due to a foreclosure situation.

 

The reason, mainly, is because roughly 85% of people who were in forbearance have figured out a solution.

 

Either they figured out how to tack on payments to the end, they’ve gotten caught up, have made a balloon payment at the end of their mortgage with their lender, or whatever the case is, they have a solution. So those people, at least in our state, ending up on the auction steps is very unlikely, especially when there’s so much equity tied to their houses.

 

However, we’re most likely going to see a good amount of inventory, probably in the tens of thousands of units, hit the market again in 2022 as the foreclosure option starts to happen. 2022 might likely be the year that the real estate supply and demand imbalance starts to shift and pivot a little bit back towards the center instead of skewing totally towards the seller side. It is because, if you consider it, the people at the top end of the Baby Boomer generation will turn 76 next year. In addition, some foreclosures will pop up, and, hopefully, some more new construction will become available.

 

We’ll see, but right now, the data seems to suggest we might be heading in that direction.

5. The cost of materials for new construction has increased significantly.

I have pointed this out over the last couple of videos, but still, I want to reiterate it. The one other thing I want to point out to you is that it is very expensive right now to create an expansion, whether to build a second floor or something new onto someone’s existing home.

 

The cost of paper alone, meaning permits, engineering drawings, architecture drawings, etc., has increased drastically, almost double.

 

In many cases, at least here locally, people spend $20,000 to $25,000 before they even start to nail something into a piece of wood. Not only that, but once you get through that permitting process, you will then have to face the reality of the fact that there’s a huge premium on lumber, plywood, copper, and other building materials. 

You name it, across the board, there’s a premium right now. The cost of plywood and lumber alone has increased 250%-300%. In addition to this, there is a shortage of truckers. Thus, once you get that piece of lumber, that beam, onto a truck, it becomes more expensive just to drive it from a port or wherever it is in Canada or the Pacific Northwest, where they usually come from, to you. Hence, everything has gotten more expensive, and people would spend $450-$500 or more per square foot just to do an add-on.

 

Moreover, since the pandemic, labor shortages are rampant in the construction industry, adding salt to injury.

 

This makes it even more costly in terms of time and money to hire laborers for that expansion project on someone’s house.

 

When you couple all that cost with the site, the amount of headache someone has to go through, and just living in a construction zone, it gets really daunting. That is the very reason why folks are putting a premium on that existing inventory.

 

When that inventory is limited, and debt is cheap, and people have the cash to continue to invest, we end up in a position like what we’re at today. Hopefully, next year, we’ll start to see a bit more inventory trickle onto the market and give us that opportunity to squash some of that imbalance and come back towards the center, towards the equilibrium.

 

But let’s be honest, it’s not going to happen fast. It’s not going to happen overnight.

 

It’s something that’s going to be a reality of ours here in California and definitely in the East Bay for years and years to come. So again, 1) once the baby boomers start to actually sell their single-family assets or trade them or pass them down through inheritance to their millennial children, 2) when the foreclosure potentially starts to hit the market at some point next year, and, 3) construction costs come down a little bit because the supply chain has been figured out and then there’s that amount of money it cost to do that addition isn’t prohibitive anymore, I think that’s when we’re going to start to see a shift in the market.

 

We will have to keep an eye on that as it is not a simple problem with a simple solution, certainly, but it is absolutely one to keep your eyes on. So if you’re thinking about transacting, buying, or selling, this matters to you. Make sure you start to do your research.

I hope my Bay Area Real Estate Market Update 2021 "Is the Inventory Dam going to break? | Real Estate Supply and Demand" has helped you.

If I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below. 

Here’s to all your success!

Best,

Hans Struzyna

Real Estate Supply Side

The market has shifted and you need to be aware of where we are going. I have created a free resource packed with all the information I tell all my clients when they start shopping.

Download my COVID Era Buyers Guide:

Real Estate Supply Side

(510) 768 - 8228
DRE # 020284245
EastBayHans@gmail.com