**The Surge in Housing Demand During the Pandemic**
The COVID-19 pandemic brought about a surge in housing demand in 2020 and 2021. According to researchers from the Federal Reserve, the increase in demand was so significant that housing supply would have needed to rise by 300% to match it (Federal Reserve researchers, 2021). This surge was mainly driven by the shift to remote work and the separation of roommates in search of larger living spaces (Federal Reserve researchers, 2021).
**Shortage of Housing Inventory**
At the peak of the Pandemic Housing Boom, only 546,151 homes were available for sale on Realtor.com in July 2021, compared to 1,239,298 homes on the market in July 2019 (Federal Reserve researchers, 2021). However, the surge in housing demand was subdued by a mortgage rate shock in 2022, causing the average 30-year fixed mortgage rate to increase from a 3 handle to a 7 handle (Fortune, 2022).
**Limited Recovery of Housing Inventory**
Despite the impact of spiked mortgage rates, housing inventory has not surged back to pre-pandemic levels. In July 2023, the number of active listings for sale (646,698 homes) was 18% higher than in July 2021 (546,151 homes), but still 48% lower than the levels in July 2019 (1,239,298 homes) (Fortune, 2023).
**Reasons for Limited Recovery of Housing Inventory**
There are two primary reasons why housing inventory has not returned to pre-pandemic levels despite the ongoing housing affordability shock.
Firstly, from an aggregate perspective, U.S. homeowners are in a robust financial position, with mortgage debt payments accounting for only 3.9% of U.S. disposable income in the first quarter of 2023 (Fortune, 2023). This indicates that there is no significant financial strain on homeowners, making them reluctant to become “forced sellers” or face foreclosures.
Secondly, there is the phenomenon known as the “lock-in effect.” Move-up buyers find it economically disadvantageous to sell their current homes with favorable mortgage rates and acquire new properties with higher interest rates (Fortune, 2023). This has led to a decline in new listings, reducing the overall inventory count.
**Local Variations in Housing Inventory Recovery**
Among the nation’s 200 largest housing markets, only seven have returned to pre-pandemic inventory levels. These markets include Killeen-Temple, Texas; Lubbock, Texas; Kennewick-Richland, Wash.; Waco, Texas; Austin-Round Rock-Georgetown, Texas; Huntsville, Ala.; and Beaumont-Port Arthur, Texas (Fortune, 2023). These markets have higher levels of supply coming onto the market and experienced bigger demand pullbacks during the mortgage rate shock.
For instance, Austin, Texas, which experienced a fierce Pandemic Housing Boom with a 63% increase in home prices, has seen a sharper increase in inventory. The increase in inventory in Austin coincided with a 10.2% decline in home prices from June 2022 to June 2023 (Fortune, 2023). On the other hand, Hartford, Conn., saw a less dramatic jump in home prices during the pandemic (37% increase), resulting in a smaller inventory jump. The inventory in Hartford remains 79% below pre-pandemic levels, while home prices rose by 8% between June 2022 and June 2023 (Fortune, 2023).
In summary, the surge in housing demand during the pandemic led to a shortage of housing inventory. The recovery of housing inventory has been limited due to various factors, including homeowners’ robust financial position and the “lock-in effect.” There are local variations in the recovery of housing inventory, with only a few housing markets returning to pre-pandemic levels.