Market Analysis, Strategy Analysis

The Inevitable 2021 Housing Crash: Inventory Deluge (Pt. 1)

Nearly everyone is in agreement that the 2021 Housing Market is ridiculous and unsustainable. With home prices up 12% year over year and active inventory at a record low, things are the hottest they’ve been since the mid-2000s!

And unfortunately (or fortunately, depending on if you’re a seller or buyer) the 2021 market seems to be heading in a similar direction as the mid-2000s market: straight into a Housing Crash.

This post is the first in a three-part series that will explore the data behind the 2021 Housing Bubble. Today we will analyze how the low inventory levels of the current market are unsustainable and likely to be met with a Inventory Deluge.

This Inventory Deluge will serve as the initial prick that deflates the 2021 Housing Bubble.

Home Inventory Down, Home Prices Up

There is no debate about one thing: there are very few homes on the market right now. Active Inventory – the number of homes available for sale across the US – has dropped from 1.3 million to 500k over the last 18 months (green line below).

When Active Inventory drops so much it signals that there are significantly more home buyers than sellers in the market. This demand imbalance causes prices to rise, which is why the Median List Price across the US has grown from $300k to $370k in the same span (+23%; blue line below).

Home Prices have surged while Inventory has plummeted.
The massive decline in Active Inventory is driving home prices to record highs. (Source: Realtor.com)

The divergence of the green and blue lines in the graph above explains most of what you need to know about the 2021 Housing Market. Active Inventory down to record lows is causing Home Prices to soar to record highs. It is a true sellers market, with buyers tripping over themselves to overbid on unspectacular homes in unspectacular locations.

But here’s the thing about Active Inventory: it is a relevant indicator, but only in the PRESENT. It doesn’t say much about the future. For instance, Active Inventory levels in 2019 measured around 1.3 million available homes for sale. Did this metric provide any future predictive value about inventory levels would be like in 2021? Of course not.

And that’s the rub. Home buyers and real estate investors who care about their investment security and appreciation want to know what’s going to happen in the future. The question we should be asking isn’t “What’s inventory and price appreciation like today?” It’s “What does inventory and price appreciation look like into the future”?

Why Active Inventory is Going to Bounce Back

Each year, like clockwork, roughly 5.3 million people list their homes for sale. These people are looking to upsize, downsize, move closer to family, move closer to work, or maybe just want travel the country in an RV for the rest of their lives. Whatever the reason, 5.3 million homes hit the US market each year.

Until 2020.

New home listings plummeted to 4.4 million in 2020, a decrease of 800k. This New Listing Shortage is fundamentally driving the low Active Inventory levels we see today.

There is a huge listing in new home listings over the last year.
New home listings declined by 800k in 2020, contributing to the low Active Inventory figures we see today. (Source: Realtor.com)

The New Listing Shortage has continued through early 2021, with approximately 250k fewer homes being listed in the first three months of the year compared to 2020. That brings the aggregate New Listing Shortage to nearly 1.1 million homes over the last 15 months.

So 1.1 million people who would have normally listed their homes for sale have failed to do so. The Million Dollar Question is: Why?

The answer is pretty intuitive. The health and financial insecurities caused by the COVID pandemic caused people to delay making life decisions such as moving and selling their home.

But these 1.1 million people aren’t going to delay their moves forever. The basic desires to upsize, downsize, be close to family, and be closer to (or farther away potentially) from work haven’t changed much. As home prices continue to rise and the world normalizes, the 1.1 million deferred listings will eventually hit the market.

And when they hit the market, they will come fast, significantly increasing Active Inventory and putting downward pressure on home prices.

The New Construction Glut

But there’s yet another source of new inventory that will begin hitting the market in late 2021: Newly Built Homes. The record low Active Inventory levels of today are prompting many home builders to build new homes to meet the demand. That’s a good thing – more housing supply is a welcome thing for society.

But the levels of new home building are beginning to approach the highs experienced in the mid-2000s. And we all know what happened after that.

Home builders and apartment developers are back to mid-2000s permitting levels.
Home builders and apartment developers are pulling significantly more permits for new construction over the last year (Source: US Census)

Data from the US Census Bureau shows new home builders and apartment developers permitting 1.6-1.9 million units on an annualized basis to start 2021. Those levels are 30% higher than two years ago and beginning to approach to 2.0 million annualized unit figures from the mid-2000s.

When a developer pulls a permit it usually takes 6-18 months for the completed unit to follow, meaning that evaluating permitting data today gives you a window into the future of housing supply.

The net result will likely be an extra 500k newly built units hitting the market over the next 12 months.

Putting it All Together

Taking the 1.1 million backlog in re-sale units and adding an additional 500k newly built units on top will significantly shift the dynamics in the US housing market. Supply will begin to exceed demand, causing Active Inventory to surge and putting downward pressure on prices. That’s when the 2021 Housing Bubble will start to deflate.

These effects will be further exacerbated by a decline in Housing Demand, which will lead tot he inevitable crash, which is a topic we will cover in our next post. Stay tuned and make sure to bookmark this sight and subscribe to Reventure on YouTube so you don’t miss future content!


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