Zillow Economists Explain: Why Inventory’s Still Low & What It Means for New Construction

In March, when COVID-19 began sending economic shock waves across the country, aspiring home buyers, sidelined by years of low inventory and out-of-reach prices, took to the internet with a common question: “Is now a good time to buy?”

Chances are they were recalling the Great Recession, when the burst housing bubble led to a flood of foreclosures hitting the market. 

Five months into COVID-19, it’s clear that the current recession is nothing like the last one. Instead of swelling inventories, there are even fewer homes for sale now than there were at this time last year — 20% fewer — and price declines have barely registered. 

So what’s going on? Why, during a time of widespread unemployment and dramatic economic decline, are there still relatively few homes for sale? Why haven’t home prices dropped dramatically? And how can home builders help buyers who want or need to buy right now position themselves to act if a suitable home comes on the market?

Slight price declines expected before rebound begins in fall

The U.S. economy has never had a sudden shock like the one we’re now experiencing, so no one knows how buyers and sellers will continue to respond. Economists at Zillow have been tracking key signals to predict what will happen to the supply of homes and the prices they’re selling for.

Based on those early signals, Zillow economists predict that home prices will decline by 1% to 2% from February highs to an expected low point in early fall. After that, prices are expected to return to pre-coronavirus levels before summer 2021. 

Skylar Olsen, senior principal economist at Zillow, said early signs indicate a surprising degree of buyer confidence.

“There are signs buyers are showing up,’’ she said. Mortgage purchase applications and pending home sales initially dropped off in March, but then quickly snapped back; and online searches for homes — likely a combination of recreational browsers and serious buyers — rose 50% above previous levels.  

Olsen said prospective buyers, many frustrated by low inventory in previous shopping seasons, seem to think that now might be a good time to get a good deal on a home and lock in a favorable mortgage rate. Meanwhile, homeowners seem to think they might be better off waiting to sell until the economic picture becomes more clear, Olsen said.

“Those two behaviors offset each other,” she said, which results in even fewer homes being listed for sale and helps explain why — even as COVID-19 was hitting the economy — bidding wars for homes were still occurring in some markets.

“Hopefully, sellers are watching buyers return,’’ Olsen said. “That builds the confidence of sellers, both existing homeowners and builders, to start returning more inventory to the market.”

What else is driving the housing shortage?

Even before the pandemic, there were more people who wanted to buy a home than there were sellers.

Four main things have driven the shortage:

• a record long expansion and low unemployment, pre-COVID-19
• historically low interest rates that give people more buying power
• a sizable new generation of home shoppers entering the market while older generations were choosing to hang onto their homes
• a sharp drop in new home construction over the past decade

In order for home builders to keep pace with the number of new households formed in the U.S., they need to build 1 million homes every year. Building has lagged far below that pace, mainly because the industry was decimated during the Great Recession and had only started showing signs of come back earlier this year.

The Great Recession also disrupted the retirement and downsizing plans of older generations: Their savings took a big hit, and their adult children — facing under-employment, record student loan debt and fast-growing rents — moved back home. With retirement on hold and more adults to house, fewer baby boomers were putting their homes up for sale, further constraining supply.

The timing coincided with the emergence of a new crop of buyers from the massive millennial generation, who are just now hitting their peak home-buying years.

With a relative scarcity of newly built homes, the inventory of for-sale homes has consisted mainly of existing homes. 

Historically low interest rates fuel demand

Interest rates on mortgages, which have been at historic lows for some time, also have fueled demand.

Low mortgage interest rates boost buying power and make homes more affordable. 

“The low mortgage rate is the deal right now, not falling prices,’’ Olsen said. “That is a huge boon for buyers.”

But it becomes less of a boon if the shortage of homes for sale keeps prices growing at a fast rate. After all, the mortgage rate can’t help someone build a competitive down payment in the first place. And since credit is tight, buyers who planned to put down 5% might not get a loan unless they put down 10%.

Builder incentives helped lower new-home prices 

After years of super low builder confidence, the home-building industry appeared ready for a comeback in January, when construction began to finally keep up with the formation of new households. 

The sudden uncertainty around COVID-19 caused builders to pull back. Some began offering buyer incentives to reduce the inventory on their books, offering one of the few opportunities for a “deal” right now, Olsen said. 

The incentives helped lower the median price of a brand-new home to about $300,000, which is an affordability sweet spot for many buyers, according to Olsen.

Whether those promotions and incentives hold depends on the demand for new homes and the cost of building under safety restrictions to minimize infections on job sites — both of which will affect the supply of new homes coming down the pipeline. A lot will depend on whether buyers keep showing up, she said, and whether buyers are confident enough to stick with their long-term plans.

“The first two months of 2020, there was a sense that the dam had broken, and that builders were ready to come out of the gates,’’ Olsen said. “And if you think that was going to be the case, then you have to think they’ll want to keep that momentum going.”

The share of un-started but sold new construction homes was nominally higher in May than in April and in May 2019. But that’s still somewhat lower than long-term averages. And housing starts and building permits were both down for the year.

“That indicates that builders are not going to start building until they absolutely know that they’ve got a buyer and they can sell the home,” Olsen said.  

Most home shoppers — 64%, according to the New Construction Consumer Housing Trends Report 2019 — are already potential new construction buyers who are open to buying one. 

Economists are watching to see whether COVID-19 will make new construction homes even more attractive to buyers.

How you can help buyers during COVID

• Embrace all the tools that allow homes to be toured remotely and safely so your clients can move quickly if the home is a good fit.
• Zillow 3D Home is now compatible with your buildable plans. Contact your Zillow representative for more information.
  
  See how it works
• Utilize the Real-Time Video Tour feature on your Promoted Communities listings.
  
  Here’s how to do it
• Showcase your home and community with Video Upload for New Construction. Videos help to showcase the amenities of the community as well as listings and plans, and are a safe way for customers to virtually take a tour.
  
  Get more details here

• Determine their budget and how high they want to go. Share the floor plans and upgrades that map to their budget.
• When sharing different floor plans, ask them to reflect on must-haves and things they’re willing to trade-off, especially if working at home is a long-term option not just in their current job, but in their industry. Can they handle a longer commute? Is a home office a must-have?  
• Help them think about what their life might look like three to five years down the line. According to Olsen, “The house has to work for them in five years for this to be a really confident home-buying decision.”