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Summary:
Jim, Keith and Jonathan discuss the wild inventory issue.
We hope you’ll join us for the next episode of Sweat the Details. View the full transcript below.
Jim:
Hey everybody, this is Jim with Nest Realty. This week on Sweat the Details, Jonathan, Keith and I talk about what many of us are seeing around the country. Inventory, builders, labor, climate change, all sorts of related topics. We’d love to hear what you’re seeing in your markets and we hope you enjoy the conversation. All right guys, welcome back to Sweat the Details. Good to be sitting around the table with Keith and Jonathan. What are we talking about today, Jonathan?
Jonathan:
Inventory.
Jim:
Oh, fun. There’s lots of…
Jonathan:
Challenges.
Jim:
It’s going to be a pretty short conversation.
Jonathan:
Yeah, sold out. I was joking with somebody the other day. I was, “What happens if real estate just sold out and instead of for sale signs, you would be driving around town and there would just be, sorry, this town is sold out of real estate. Go to the next town.”
Jim:
Well, I know some people in the Charlottesville area who would love to say we’re sold out and no more people who are allowed to come. Yeah.
Keith:
It’s like a T-Swizzle concert.
Jim:
There you go. No, I think around the country we’re seeing shortages of inventory and there just are not enough homes to buy. We’re still seeing the escalation clauses and multiple offers, and buyers are not able to find a house that they’re looking for. I’ve represented a number of buyers over the few years that just can’t find anything, or they’ve lost and they got tired and frustrated and they gave up and either didn’t move here or they continued to rent. Keith, why? From your lens, why do we not have enough inventory?
Keith:
Too many buyers and too few homes?
Jim:
Have a great day, everybody.
Keith:
The end. No, I think there are a couple of pieces to think about. Number one is what’s enough homes? And I think that’s part of what we need to define is what’s enough homes. So when we all got into the business 15, 20 years ago, everyone said six months is a balanced market. If there’s more than six months supply, meaning if every single home that was listed on the market sold at an even rate in six months, we’d be out of inventory. So if we’re at six months, that’s a quote balanced market. The reality is it has been since 2018, since we’ve even seen a four-month supply in the state of Virginia.
Now, I don’t have the numbers for North Carolina or any of the other states in which we operate, but in Virginia, it’s 2018, 5 years now since we’ve even seen a four-month supply. We’re currently on an uptick at 1.2 months. So we got about a 40-day supply of homes, and that is just nothing. That really is tiny. So what is driven it? If we go back to 2005, 2006, when we were having the heyday run-up of things, builders were all going crazy. They were constructing as fast as they could get lots available to them. They were selling everything. We had a balanced market.
When the great recession hit, so many builders either pulled back dramatically, went out of business, changed to a different building model where they weren’t doing spec homes, they were doing construction on demand, they were waiting until they had contracts. And the number of builders that were out there and the amount of financial resources that were being put into those constructions just meant that we were dramatically on a downturn of not building enough homes for new household creations.
Jim:
So you wrote a paper years ago.
Keith:
Yip.
Jim:
About the local builders and how many of there were, and then what happened?
Keith:
Sure.
Jim:
Do you remember those numbers?
Keith:
I’m not going to get the numbers completely right, but we looked at 2005 to 2009, the difference in the number of home builders active in the marketplace. And I think that there were 13 or 14 home builders that comprised the top 75% of sales within the Charlottesville market. By 2009 it was 3. And the consolidation that took place, we lost so many local home builders in many markets. And the National Home Builders, the NVR homes, the Pulte’s, the Toll Brothers, D.R. Horton, the ones that we see publicly traded, those guys took off and they really started being the only buyers who had access to enough capital to take down lots. And they controlled the home buying process. The home building process rather.
And so what we have found, and there’s no question we’re seeing more and more smaller builders coming back to the market, we’re seeing people recapitalizing and getting back out there, but we’re still in most markets in which Nest operates, we’re seeing large home builders are building the absolute lion share of homes, and they are changing the way that we build those properties. They are still wanting to have contracts before they build. We’re just not seeing the spec homes that are going up at the same rate they were in 2005 and ’06.
And so for a long time, if you look at the economic numbers right after the recession, we were seeing a 2 to 300,000 home shortage per year. And that deficit was becoming a debt and it became over a million too few homes in America. This isn’t a localized problem, this is a national issue. And so household creations continued. People continued graduating from college, getting married, starting families, wanting to go out on their own, and they just didn’t have the housing available to them. And they went into their parents’ basement and they went into the apartments that were available.
We’ve seen a huge shortage of multi-family rooftops being built over the last decade. And all of this just leads to a shortage of homes. I think there’s some other factors at play in particular when we get interest rates where we have, we’ve seen more and more of our sellers say, I’m not going to sell my primary residence. I’m going to hold it as a rental property. I’ll take all my equity out, use the equity to buy my next house, have a low mortgage at 3% because we had that for so many years, and they’re holding onto their first home, they’re renting it out, and then there’s no new inventory when they go buy another house.
Jim:
Yip. I’ve had a number of clients have done just that. And I think that pulls two houses off the market, which is again, I think that we’re seeing a significant shortage. And one of the things that I’m seeing, and I’d be curious to hear feedback from others who listened what their markets are doing, but in the Charlottesville area, it feels like there’s low inventory. So there’s no argument about that. But it feels lower, I think, because a house will come on the market on a Monday as a coming soon, goes live to the MLS and Zillow and realtor.com on Wednesday, Thursday. And then because there’s such a shortage and there’s still high demand offers are accepted until Monday or Sunday or whatever that deadline is. And then those buyers who have three houses came to the market that they like all of them well enough to look at and consider, they have to pick one.
So for them, it feels like there’s not enough houses on the market, even more so because they have to pick one of the three-
Keith:
Each week?
Jim:
Each week. And I did an open house last week at one of my listings, and it was fascinating because I talked to one another buyer who went to a different set of open houses, the buyers were seeing each other at the six open houses that they were all going to, and they were recognizing each other and saying hi to each other. And the buyers I was able to engage with, they were frustrated and they were tired because they have been doing this for so long. And I can imagine it’s deeply frustrating to see your competition at every single house and-
Keith:
Get to know them, yes. Look at Nest, we have an amazing marketing department and they do note cards for every occasion. If your clients are having babies, we have note cards for it or engaged or whatever. Last year, our marketing team came out with a note card that had jackets hanging on a coat rack that said, hang in there. And the inside was, we know this has been hard to find a house, we’re going to get through this together. And I think the fact that what would I love to see in ’23 is for people to stop using that card because it’s unfortunate. It’s really difficult to watch buyers go through that because it is a really difficult process and there’s just nothing out there for them to look at.
Jonathan:
No. We bought our first house in a market that was pretty active, but it wasn’t anything like this. And the couple houses that we’ve bought, I can’t imagine going in and knowing that there’s going to be eight other people that I’m competing with and looking at the list price and just basically throwing in the trash can and saying, what can I afford? How high can I go? And look, this whole inventory thing, if you went back to when we would be, it would be June of 2020, and you go back to June of 2020, and a lot of us talk about every market’s local, every market’s local. Almost every market in the country has been almost identical lockstep since summer of 2020. And what’s the answer or what’s, Hey, how’s the market? And the answer is, there’s no inventory and there’s more buyers and there’s eight offers in a house and blah, blah.
You could take that and you could do that in San Diego, Seattle, Boise, on all the way down to Charlottesville and any other small town across the country. And it’s amazing. And it comes down to this why, and it’s this perfect storm. And that’s really where we are right now. We are in a not in a good perfect, but a bad perfect storm of what happened with rates. What happened with the pandemic, builder production is down and buyer demand is up. And one of the reason buyer demand is up is I think, is because the psychological component of you want, you want what you can’t have.
And so you may kind of want a house, but if all of a sudden you’re told you can’t have it, you really want it. Just like when you drive by Chick-fil-A on Sunday, you may not be hungry, but you want Chick-fil-A on Sunday.
Keith:
There’s such a huge FOMO on all of this. Yeah, no question.
Jim:
Well, I think you’ve seen stories have come out about a large percentage of buyers have buyers remorse after buying within the last two or three years. And I’m making this up to a certain degree, but now they can’t sell because they’ve got a 3.5 interest rate and they’re not going to sell, even though they have regrets about the house or the location that they purchase.
Keith:
They love their payment more than they dislike their house.
Jim:
When you go from 2.5, 3% to 7%, that’s a bit of a difference.
Jonathan:
Especially when prices are up 25% from when you ReFi’d or when you bought. So yeah, it’s a challenge. And the other thing, I think one of the other psychological aspects that we’re dealing with is, once again, when you lose a couple times, the mentality is I just want to win. And this is when the buyer’s remorse comes in and it’s like, the house is 500, I lost, I offered 525, now the house is 525 and I offered 550 and the next house is 550. Well, what do I need to do to win? Because emotionally I can’t go through this again with myself or potentially with my family is, I got to get a house. And so I got to end this cycle. And so unfortunately, hey, look, if you’re a seller right now and you have someplace to go, good for you. But if you’re a buyer, it’s brutal.
Jim:
Well, it’s the second piece of that. I imagine every agent who who’s productive has the same story. I have 5, 10 potential sellers who I talk to who would love to sell their house, but where do we go? They can’t find the next.
Jonathan:
But would they go someplace or do they have the golden handcuffs of 2.65%? Because the stat that you threw out earlier about rates was-
Jim:
Yeah, I think it’s 99% of American mortgage holders have fixed rates below either 4 or 5%. I think it’s 4%. And a third of American homeowners don’t have mortgages. And these aren’t the cash buyers that you read about in the news of they came in and paid cash because I think there are stats out there, but I’ve waged that a large percentage of those “cash buyers” ended up getting loans.
But again, my mom, who’s lived in the house for 27, 28 years, just paid off her mortgage. She’s not a cash buyer, but she is a former mortgage holder and she owns her home outright, which is amazing. So I think that it’s these sellers that I have would love to sell for any number of reasons, but they just can’t find a place to go. Whether it’s downsizing or upsizing or whatever it is, I think that where you’re seeing the sellers come out of the woodwork, if you will, are the ones who got a job offer and it’s so good they can’t not accept it.
Keith:
Right. So that’s the question is, we’ve had throughout the pandemic period… and we won’t even go back to 2018 where we had more of a balanced market, but over the last three years we have seen voluntary purchasers entering the market because they think it’s a good financial decision to buy a house or a good financial decision to move because the prices have escalated enough that they’ve got equity they want to utilize to a bigger purchase. What forces the buyer today? What are those pieces that people can’t avoid?
So like you said, you get a new job in a new market, you have to move. You got to sell your house because you can’t afford to own two homes, but it does become inventory and you become a buyer in a new market. What are the other things that are going to kind of start lubricating this market a little bit?
Jim:
Life.
Jonathan:
Yeah, it’s birth, death, divorce, job. There might be a couple other beyond that, maybe huge windfall, right, win the lottery. Could that be one? How far down the line we have to go? But I’d say those first four that I mentioned are the big ones that, hey, look, if rates are 3% or they’re 6%, I got to do something because I fortunately or unfortunately fall into one of these buckets. And I do think that people are becoming acclimated… not all, people are becoming acclimated to seeing a 6 with mortgage rates, whereas a couple years ago, they would see 2’s and 3’s and that was the norm for it. But not everybody is still used to seeing the 6 yet. So they’re probably still holding back saying-
Keith:
Wait for fives.
Jonathan:
Let me wait for it to be 5 or wait for it to be 4.
Jim:
I think the thing that forces a lot of buyers hands, I think, is they come to the recognition that in order to have agency over their lives and confidence with where they’re going to live. They want to make the often very expensive decision to buy a home and shift from renting. Because my clients will tell me, I want to get out of renting. I want to start saving, creating equity. But also, I look back to a client of mine years ago who we had a long journey to get to… this is probably 15 years ago, long journey to get to the process, but after they bought the home that they’re still in, and she wrote me an email or letter, but she said, tears are coming down my face as I write this because now I know where my kids are going to go to school because I live in a place that we own and we’re never going to leave unless we choose to.
And I think that that’s the thing that the buyers, a lot of them are looking for is they’re looking for that place to raise kids or more of my clients, they want to raise their dogs, they want to raise their cats. I have more dog clients and cat clients. But I think that they choose to be in that place for years. And I think that that is something that is great societally for them, but it pulls inventory off because they’re making life decisions for 10, 15, 20 years. And so it goes back to how do we create more inventory to satisfy the demand for the people who aren’t going to buy that house? And I think it’s going to come down to new construction somehow.
Keith:
Okay. So builders right now are not producing enough houses. We’re still hundreds of thousands per year below what absorption rates would be. The biggest limiting factor still continues to be lot availability continues to one of… if you talk to builders, they’ll tell you that governmental regulatory costs are prohibitive on getting those lots to market. What else can happen? How do we get builders to start accelerating? We have a labor issue, we have a materials issue, we have a lot availability issue. We have a financing issue. Everything is stacked against the new construction. Getting to a point where we’re going to have a level inventory, right?
Jim:
Yeah. I’m pausing because I don’t have an answer because you’re right. I think we need more labor. We need more generational labor. We need more immigration. We need more availability of land. We need to have lots delivered faster. And frankly, we need prices to come to a point where buyers can afford those too. Because I think that in our market, the average cost of new construction is astronomical.
Keith:
There was a number I looked at from the National Association of Home Builders a couple of weeks ago that really kind of frightened me, that had the number of families or buyer pods in Charlottesville, Albemarle area that would be priced out of new construction if new construction prices went up by $1,000. So we’re talking about 580, 600,000 is the average detached new construction home. A movement of $1,000 prices 50 families out of the market. Today, they can buy a house, tomorrow they can’t, if it goes up by one grand.
Houses are not going up by one grand. They’re going up by 10 and $20,000 clips. So we’re losing 500 buyer opportunities when there’s that kind of a movement. It’s frightening to think what that does culturally to a community, what it does, just long-term socioeconomic, the ability to start creating wealth and start building equity if we have that many buyers that just can’t make the move.
Jim:
I think that one more negative thought, I think is we’re going to see continuously shrinking inventory as you have places where they become unlivable. You’ve reading the story recently about somewhere out west that the community just doesn’t have water, full stop, they don’t have water. And you have places that are being flooded and you look at Norfolk, it’s going to spend a couple billion dollars to shore up their shore. So I think we’re going to see less available land. But I think on the flip side, you might see people moving to these areas that are less populated today because housing prices are lower.
Keith:
I will say, Jonathan and I were out in Arizona last month with our owner out there for our office in Phoenix, and there’s no question, the conversation of water is the absolute hot topic of how does construction get managed? How does population growth get managed? That’s a huge question that really, in the east coast, we don’t have to face. We have other questions, but that one we get to pass on.
Jim:
Yeah. So again, I think that what is, it’s March, April, 2023, inventory’s low and it’s going to stay low. So I think that the advice to think for agents is just get better at what you do and get better at helping buyers make life decisions. And for sellers, it’s counsel them to have life planned so they can go somewhere else if they have the opportunity. But from my point of view, I don’t see the inventory shortage being solved in the next 6, 18, 46 months.
Jonathan:
No, I think there’s one thing we’ve learned from the last couple years, it’s our predictions are almost always wrong, so I’ll preface that, but I don’t see a way out either. I think that if prices continue to go up, at a certain point in time, people can’t buy-
Jim:
Demand goes down.
Jonathan:
Demand goes down, and inventory that sits in the market, not necessarily on Thursday, Friday, Saturday, Sunday, as you mentioned earlier, when the bulk of listings are sitting right now, the inventory is going to increase and it’s going to be higher. So pricing is a big piece of it. If prices continue to go up and rates stay the same, affordability goes down, demand goes down, that’s one path. And then the other path is, I don’t even know what this is, and I hope it doesn’t happen because on the last podcast I mentioned I would love to have this be a boring market, but is there some other black swan event that comes in and changes the complexion of inventory or demand or supply? And I’m not saying that we need to answer that question now, but I hope not. But something could happen that could really kind of shift the market.
Jim:
It could. Whenever I think about the market, I’m just trying to figure out, I think of two things that different agents said to me years ago. One, I said, “How’s the market?” And he said, “I’ve stopped trying to figure out what’s happening in the market because it doesn’t matter what I think about why, I know that the market ties into what the next agent told me years ago during the crash.” I said, “I asked her,” I said, “how’s the market?” And she said, “Jim, the market is.” The market is. I have buyers who need to buy and have sellers who need to sell.
And so I wake up every day trying to represent my clients and her voice is in my head. She used to be an English teacher, and I think-
Jonathan:
I know exactly you’re talking about, yeah.
Jim:
That has stayed with me for almost 20 years because the market is. We can talk about the inventory, we can talk about the shortage, we can talk about the rates, we can talk about any number of things affecting the market, but the three of us sitting around the table and listeners for the most part are not going to be able to affect it. We just have to go out and do our jobs and confidently represent our clients and look after our agents and each other.
Jonathan:
Yeah. We traded an email a couple days ago about this, but I read this article about shoe inventory. This is clearly not related to real estate, but maybe econ that we’re talking about. But shoe inventory, Nike inventory has reached an all-time high. Their shoe inventory has reached an all-time high, and it’s like 10 billion of inventory. Their inventory is up 53% in the last three years. You’re going to correct me, I’m probably going to say this wrong, Adidas, Adidas.
Jim:
It depends on where you are in the world.
Jonathan:
Their inventory is at an all time high too. But they’ve all come out and said, we’re going to solve this problem. How can they solve the problem? They can reduce the price of their shoes, they can figure out other distribution channels. Look, it’s not going to be foolproof, but if Nike says, we want to sell these shoes tomorrow, they could reduce the price from $179 to $49 and shoes will sell. Even if I don’t need another pair of shoes and I go in and I see these shoes are now 80% off, I’m, huh, I might buy another pair of shoes. Doesn’t work that way in real estate, right?
This is a fragmented industry from a seller standpoint. The home builders may be a little bit different, but there’s no home builder that is that much of an impact on the market across the country that if they decide to reduce prices by 10,000, that it would drastically increase sales.
Keith:
Sales. No, but in Austin, Texas, they’re trying right now, and I think this does speak to one of the… and I’m trying to remember what pod I was listening to recently, was talking about the Austin market because they’re finding that sellers of existing homes are having trouble pricing because the builders are so fast to jump on the need to adjust the price to get demand when they realize they’re going to have a supply issue, that the sellers of existing properties can’t respond quickly enough. Because they’re not willing to take the loss. The builders are willing to give up a builder incentive to move their properties without lowering price, right? And I think that’s the-
Jim:
Go ahead. Well, because sellers of existing homes are anchored. The builders, they look at their charts and they look at their spreadsheets or whatever, and they’re, oh, we’re going to do this because of this.
Keith:
We’re going to limit our loss.
Jim:
I was negotiating property a couple weeks ago, and one, they got the price they were asking for. We went in low based on the comps, and my clients were okay with that, and they knew they might lose. And the agent said, “Well, my clients are really anchored to this house that’s sold literally a year ago. And they said, we were planning to get that. And I was like, “Well, my guys are planning to pay less.” But the seller ultimately got their price. So I think that the sellers, if they hadn’t gotten their number, they might not have moved. But I think that you look at what’s happening with the builders, they have, I won’t say luxury, but they have the ability to shift much more rapidly up and down. And I think that that’s a component of what this market is.
Keith:
Yeah, so the big question will then become is do builders build our way out, or does the demand start decreasing to help us rebuild that inventory? And we watch it every day, and numbers are up, right? State of Virginia’s up about 20% this year, year-over-year. But while we say that, and that sounds like a great number, the year before that, we were down 20%. The year before that, we were down 40%. The year before that, we were down 20%. So it’s getting up 20% right now is really just barely starting to scratch the surface of need.
Jonathan:
Sure. Yeah. My take is it’s going to be a perfect storm in the other direction, kind of a slow slog. And 20% is a great first step to get back to hopefully a spot where the-
Keith:
We need 200% though.
Jonathan:
Yeah. Look, I hope that doesn’t happen overnight, right? Hopefully that’s a couple year period because if we get a 200% increase in inventory in 60, 90, 120, six months-
Keith:
The world’s going to look a lot different.
Jonathan:
Something happened that kind of knocked us on our tails again.
Jim:
No, I think we can touch on this in a later podcast, but I think that the changes we’re going to see with inventory are going to shift over a generation, because you’re seeing the demographics now. There are fewer households being formed. Because I’m 47, apparently I’m an elderly gentleman, the kids are not living the way that we do. They’re moving to different areas. They are transporting themselves around differently. So I think that we are going to see a generational shift of inventory, but it’s not going to happen in the next three years. But I think that we’ll look back… well, hopefully we won’t be doing this in 30 years, but in 30 years, agents then are going to look back and say, well look at that in the 2020s. That’s when things changed or whatever that event or marker is, I think that inventory will be solved in 30 or 40, 50 years.
Jonathan:
We can revisit that in episode 9223 in 2023.
Jim:
There you go.
Jonathan:
2053, sorry.
Jim:
But yeah, I think that my takeaway is that the market is. The inventory is going to be what the inventory’s going to be, and the buyer’s going to do what they need to do.
Jonathan:
Says it all. All right. See you soon. That was good.
Jim:
Thanks everybody. Listen to the next one.