Where is the Inventory?

1. The Psychological Factor

Let's start by examining the psychological impact a low inventory market has on sellers. 

A Vicious Cycle

Many potential sellers will need to become buyers to list their homes for sale. The idea of being a buyer in a low-inventory housing market is a concern for many. This has created a vicious cycle, where a lack of inventory is creating more of a lack of inventory, as many would-be sellers are concerned about finding their next home.

The Great Lock-In

Interest rates have doubled since the spring of 2022. Many homeowners are locked into historically low-interest rates and are reluctant to sell and lose their advantageous mortgage terms. Experts are calling this phenomenon the "great rate lock-in," and it is creating a powerful disincentive for homeowners to move.

2. The Sociological Factor: Baby Boomers and Millennials

Demographics are playing a significant role in the current inventory shortage. 

To understand this phenomenon, you have to turn to the two largest population cohorts in America: Baby Boomers and Millennials. 

The youngest Baby Boomers are nearing 60 years old. That's the age when previous generations started to consider downsizing. The Baby Boomers are the largest population cohort of Americans to hit retirement age, and we are learning that they are doing things a little differently than their predecessors. Those considering downsizing, are faced with the reality of a housing stock that doesn't meet their needs. Many baby boomers are choosing to stay in their current homes much longer than previous generations.

Meanwhile, millennials, are the largest population cohort America has ever seen. They are all hitting prime homebuying years, with the youngest millennials approaching their 30s. They are also choosing to do things differently than their predecessors, mainly, delaying homeownership. For a while, the concern was if millennials would actually choose to buy homes vs. renting and living a more shared-economy type of lifestyle. We are now finding out that they do, in fact, value homeownership. This has created a swell of ready, willing, and able buyers coming to the market.

Can you spot the problem?

Baby Boomers are not selling the exact homes that millennials want to buy creating two significant bottlenecks in the current housing market.

3. The Physical Factor: A Lack of New Construction

When there is a significant gap between supply and demand, we can usually count on some industrious parties to spot an opportunity and fill that gap.

For the real estate market, that's where home builders come into play. 

The challenge is that home builders and developers were some of the hardest-hit businesses during the Great Recession. Many went out of business, and those that survived were limited by capital and demand constraints in the early 2010s.

The Chicagoland market went from a high mark of nearly 50,000 new single-family home permits a year in the mid-2000s to a paltry decade in the 2010s where no more than 8,000 single-family permits were pulled in a given year.

Although builders have started to add more inventory to the market since late 2020, there is a lot of catch-up to be done. For one, the process of acquisition, zoning, and developing housing takes years. Second, builders have had to deal with rising costs, supply chain, and labor challenges making it difficult to ramp up production. Finally, with the Great Recession still fresh in their minds, builders are also erring on the side of conservatism as they ramp up production.

Conclusion

The lack of inventory in the housing market is the result of a complex interaction of psychological, sociological, and physical factors. It is essential to keep in mind that all markets are cyclical, and the current housing shortage will eventually give way to a more balanced market. 

While it is hard to predict how long this process will take. Barring a major economical event, and looking at the factors we laid out above, it is easy to see a scenario where we are in a low inventory market for some time.