Question #10 for 2023: Will inventory increase further in 2023?

Dec 30, 2022

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2023. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I’ll post thoughts on those in the newsletter (others like GDP and employment will be on my blog).

I'm adding some thoughts, and maybe some predictions for each question.

10) Housing Inventory: Housing inventory decreased sharply during the pandemic to record lows in early 2022. Since then, inventory has increased, but is still well below pre-pandemic levels. Will inventory increase further in 2023?

First, a brief history. Here are a few times when watching existing home inventory helped my analysis.

Starting in January 2005, I was very bearish on housing, but I wasn’t sure when the market would turn. Speculative bubbles can go on and on. However, the increase in inventory in late 2005 (see red arrow on graph below) helped me call the top for house prices in 2006.

Several years later, in early 2012, when many people were still bearish on housing, the plunge in inventory in 2011 (blue arrow on graph below) helped me call the bottom for house prices in early 2012 (see The Housing Bottom is Here).

Five years ago, in January 2018, I was quoted in a Bloomberg article that included a bearish outlook for housing. I disagreed, and the steady level of inventory helped (see orange arrow above):

Bill McBride, who runs the Calculated Risk blog and also called the crash, doesn’t think home prices are inflated this time around. Unlike in 2005, lenders are acting responsibly and the Wild West of real estate speculation hasn’t returned, he said. There is less to speculate on, too. Compared with the overbuilding that preceded the bust, today’s pace of construction isn’t fast enough, he said.

And in December 2018, I disagreed with Professor Shiller A comment on Professor Shiller's "The Housing Boom Is Already Gigantic. How Long Can It Last?". My conclusion:

No big deal, and definitely not a "gigantic" boom in house prices.

In 2019, when several commentators were bearish on housing, I pointed out there was no sharp increase in housing inventory (like in 2005), and that was one of the reasons I remained optimistic on housing and the economy (correctly!).

And the sharp decline in inventory during the pandemic (green arrow) was an indicator that price appreciation would increase. Inventory declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities). And at the same time, demographics were favorable for home buying (a large cohort had moved into the peak home buying years).

For 2022, inventory - according to the National Association of Realtors® (NAR) - didn’t increase significantly. The NAR reported inventory was up 2.7% year-over-year in November compared to November 2021. However, the NAR inventory appears to include some pending sales - and doesn’t match some other measures - and it seems likely that active inventory was up year-over-year much more in November than the NAR is reporting.

Alternative measures of inventory

Mostly I focus on inventory as reported by the NAR. However, I also look at inventory from local markets (this showed inventory was up about 33% year-over-year in November - but some local markets probably include some pending inventory too).

Here is a graph from Realtor.com showing active inventory through November 2022. Active inventory hit new record lows early in 2022 and finished the year up significantly year-over-year, but still not close to the 2017 - 2019 levels.

Here is a graph comparing the year-over-year change in the Realtor.com active monthly data to the inventory data from the National Association of Realtors (NAR). The dashed line is Realtor.com’s estimate of total inventory including pendings. It appears the NAR includes some pending sales in their inventory data, and that accounts for the divergence in the year-over-year change over the last 3 years.

Another source is Altos Research that tracks active inventory weekly. This inventory graph is courtesy of Altos Research.

As of December 23rd, Altos reports inventory was up 63.7% year-over-year, but still down 35.1% from the same week in 2019.

New Listings are Down Sharply

A key point for 2023 is that many potential sellers are locked into their current homes with low mortgage rates - and new listings are down sharply. This significantly impacts the move-up market since potential move-up buyers would face much larger monthly payments if they bought a different home.

The local market reports show that new listings were down 18.2% year-over-year and Realtor.com reports new listings were down 17.2% YoY.

Conclusion

First, although the NAR has the most history, I’ll also be using active inventory from Realtor.com and Altos Research to track inventory changes in 2023.

It seems likely that mortgage rates will remain well above the pandemic lows, and therefore new listings will be depressed again in 2023.

The bottom line is inventory will probably increase year-over-year in 2023. However, with the dearth of new listings, it still seems unlikely - but not impossible - that inventory will be back up to the 2017 - 2019 levels. Inventory is always something to watch!

Ten Economic Questions for 2023

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