The Why Behind the New Normal
Continuing our conversation about the one big thing that’s been driving the unprecedented run in the market for over a decade. We’re on the hunt for the elusive “why” behind the “new normal” of extraordinary low inventory. Where did all those listings go? Why aren’t more sellers selling?
Last week we looked at common types of transactions and how each one incrementally affects overall supply. What’s clear is that outside of building more homes and/or radically increasing our collective mortality rate (any volunteers?) there aren’t many effective ways to add supply.
Most transactions either remove properties from the larger pool or simply trade them up and down the ladder of homeownership. For example: When move-up buyers sell and then buy a bigger house or move-down buyers sell and then buy a smaller one, they are turning-over existing supply without adding new units.
Call it “churn rate” – which used to pass for “supply” as long as properties were selling fast enough, plenty of people were on the move and the population wasn’t growing too quickly. At least it seemed like there was enough supply when the average person only stayed in their home for 5-7 years. But it’s a sad fact that once there’s ultra-low inventory, that in itself tends to restrict the flow of other new listings coming on.
For example: In a low inventory market where everything sells quickly with multiple-offers, the odds against an offer that’s contingent upon the sale of another home getting accepted are astronomical. In the kind of market we’ve had for the last decade, very few contingent offers happened and the vast majority of move-up buyers and move-down sellers were discouraged from making any move at all.
The early 90s was the only time in the last 30+ years when contingent offers were part of the normal transaction process. The market regularly had five or six times the amount of listings that it has now and it wasn’t unusual for homes to sit for eight to ten months before they finally sold. Contingent offers were common under those circumstances..
The 2004-2006 market was a fast-churn market that kept rotating in choices from the existing supply like a version of musical chairs running at warp speed. Lax loan regs and the ease of getting an equity line on your current house to use as a down payment on your new house encouraged more people to buy first and worry about selling afterwards. That all worked great until suddenly, homes weren’t selling and anyone caught standing when the music stopped was stuck with two houses.
Next Week: Is more supply just a matter of building more homes?