Why is housing inventory so low? Understanding the U.S. housing shortage

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.

High mortgage rates continue to deter homeowners from selling, for fear of giving up their locked-in low rates. “Many homeowners with mortgages are currently locked in at sub-5 percent interest rates,” says Sean Roberts, CEO of homebuilding platform Villa. “Many who might otherwise be sellers are simply choosing to stay put, which is further limiting available-for-sale existing homes in today’s market.”

What is a normal amount of inventory?

Traditional wisdom states that the real estate market needs 5 to 6 months of housing supply to be balanced, or not leaning toward either a buyer’s market or seller’s market. NAR existing-home-sales data showed a 3.2-month housing supply level as of March 2024, which is healthier than the record low of 1.6 months but still continues to favor sellers.

Complicating the problem further is the tendency of particularly popular markets to draw in new residents faster than they can create new housing to accommodate them. NAR’s Housing Shortage Tracker illustrates the number of new housing permits issued versus the number of new jobs created in 174 metro areas. On average one new permit is issued for every two new jobs across these metro areas as of March 2024, but that number is much higher in some areas.

How a housing shortage affects buyers and sellers

Both buyers and sellers feel the impact of insufficient housing inventory. Many would-be sellers are unable to list their homes because they can’t afford the price of a new property at the current mortgage rates. As a result, a lot of homeowners who would prefer to downsize, upgrade or simply move on are waiting it out. That keeps those homes off the market and out of the inventory pool.

Buyers are likely to bear the brunt of the problem, though. A lack of housing options creates a very competitive market, in which many buyers must compete for few available properties. This often results in bidding wars and drives up home prices. In fact, the typical U.S. household could afford only 15.5 percent of home listings in 2023, according to a recent Redfin study.  This can also leave buyers with little power and fewer protections in the transaction, as sellers have their choice of other hopefuls who might be willing to waive contingencies and accept less advantageous terms.

How long will the shortage last?

Given the complex nature of the situation, the current housing shortage is likely to persist for some time. While lower interest rates may help, that alone is unlikely to solve the problem completely. Increases in total housing builds would also help, though high materials costs and labor shortages still persist.

And 2024 hasn’t gotten off to a good start for housing starts. New residential construction starts for privately owned housing in March were down 4.3 percent from March 2023, and down a much steeper 14.7 percent month-over-month, according to joint data from the U.S. Census Bureau and U.S. Department of Housing and Urban Development.

”It could take a while for the U.S. to recover from the current housing shortage,” says Roberts. “Houses take time and capital to build, plus, there are other factors at play. ​​Unfortunately, there is no short-term solution.”