Housing Shortage? It's All About Velocity

By Matthew O'Connor

A nationwide housing “shortage” has been trending on virtually every news media outlet across the country, causing panic among buyers eager to secure apiece of the American dream. Locally, that “shortage” is merely a perception, as the New Jersey MLS (NJMLS) actually reports a 41.8% increase in new listings for Q2 2021 vs. the same quarter 2020. Compared to 2019, a more typical non-pandemic real estate market, that number is virtually even, with a decline of only 0.2% in new listings. Real estate brokers are listing new inventory at atypical, healthy pace, but the overwhelming buyer demand means multiple offers and reduced days on market. In June, days on market (from initial listing to closed) was down 36.1% (from 61 days in 2020 to only 39 days in 2021), according to NJMLS.

The velocity at which homes are being sold has caused the perception of a housing shortage. To illustrate this point further, imagine trying to fill a bathtub with the drain open...the faucet is flowing, but just as quickly, the water is draining out of the tub. That’s what’s happening with the housing inventory, as record numbers of homes were sold in the first half of 2021. The NJMLS reported a 48.5% increase in homes sold through July 11, 2021. June alone experienced a 73.9% increase in sales.

This phenomenon is not unique to the Garden State. According to the Realtor.com’s Monthly Housing Trends Report, 52% fewer homes are available nationwide. Unsold inventory in New Jersey remains restricted with a 24% decline over 2020, but, according to the Otteau Group Market Trend Report, that figure has been shrinking slightly each month as a greater percentage of the population is vaccinated. This is creating optimism, giving homeowners confidence to “trade up” to more expensive homes.

As current homeowners are considering a move-up property, they’ll experience similar shortages as New Jersey homes above 1 million are experiencing significant declines in inventory. Luxury homeowners had experienced longer days on market in the past, but that trend is shifting in their favor. Homes priced between $1-$2.5 million have seen an 81% increase in sales over 2020; roughly 200 homes listed above $2.5 million have sold year to date (a 73% increase over prior year). In Bergen County, the big winners include:

1. Alpine with a 180% increase in homes sold since 2020 (250% increase in sales over 2019) and an average home price increase of 17.2% (45% over 2019) to $3,190,536.

2. Saddle River recorded a 200% increase in homes sold and nearly a 100% increase in average sale price ($2,00,722).

3. A 300% increase in sales and a 52.8% median home sale price increase was recorded in the affluent community of Englewood Cliffs.

According to the New Jersey Realtors Local Market Update May 2021, the townhome/condominium market is feeling a similar squeeze. New condo listings through May 2021 were up 51.3% (2,019 vs. 1,334 in 2020) and a record 1,224 sold (up 62.1% over the same period last year). Buyers seeking maintenance free living have to act fast as days on the market have dropped 16.2% to 62 days (down from 74 days last year). Prices continue to rise in this market segment too. While the single family homes are recording 15% overall increases in median sale prices, the condominiums are demanding a 7.4% price increase.

With the ever increasing population of baby boomers, the 55+ communities in New Jersey are in high demand. New Jersey Realtors reported an increase in overall listings through May up 24.2%. 53.8% more adult community properties sold with an increased sale price of 10.2%.

Historic Demand Explained

Buyer demand for housing nationwide has reached historic proportions. What has fueled this demand, and why now?

- Global Pandemic: In March 2020, the pandemic caused a global economic shutdown, as businesses shuttered and people sheltered in place to help slow the spread of COVID-19. After roughly eight weeks of quarantine, the proverbial floodgates opened, and homebuyer demand exploded as urban dwellers sought larger spaces to spread out in the suburbs. That overwhelming demand quickly decimated the existing inventory, ignited the housing shortage and shifted the market in the seller’s favor.

- Low Mortgage Interest Rates: As of July 15th, the 30 year fixed mortgage rate fell to 2.88%. According to Freddie Mac, “The summer swoon in mortgage rates continues as the 30-year fixed-rate mortgage fell for the third consecutive week. While this decline is not large, it provides modest relief to borrowers who are purchasing in a market with strong home appreciation and scant inventory.”

- New Construction Decline: Since the market correction in 2007, new housing construction has experienced a significant decline. Shortage of qualified labor, municipal approval delays and the high cost of materials has added to the slowdown. The pandemic only exacerbated the issue as laborers chose unemployment benefits over showing up for work, factories shut down due to COVID outbreaks and overseas manufacturing ground to a halt causing significant delays in delivering appliances and materials.

- There’s a New Kid in Town: Now in their mid-thirties, Millennials (the largest generation since the Baby Boomers) are entering the housing market at startling rates. Formerly choosing the urban city lifestyle for convenience and proximity to work, the pandemic fueled a migration to suburbia in search of larger spaces and resort style amenities. On the flip side, Baby Boomers who would have been seeking aright sized home are staying put until they feel safer to move, further exacerbating the supply crunch.

Market Outlook Fall 2021 and Beyond

Significant buyer fatigue set in after Memorial Day weekend, and the summer real estate market cooled slightly. Those frustrated buyers unable to snag a contract put their home search on hold to enjoy summer getaways and weekends “down the shore.” This slowing, coupled with increased inventory, should help to ease the squeeze and help the inventory “bathtub” to refill.

According to Lawrence Yun, Chief Economist of the National Association of Realtors, “As the housing inventory is beginning to pick up ever so modestly, we are still facing a housing shortage, but we may have turned a corner.” The fall market is expected to pick up steam again after Labor Day, so the listing windfall may be short lived. Economists anticipate this shortage to continue through the foreseeable future. With increased inventory, home price increases should begin to stabilize over the next two years. This would provide opportunities for additional buyers to enter the market at more affordable prices.