Inventory Running on Empty

The inventory is at an all-time low and it is only going to drop from here.

In climbing into the family car to run errands, there are times when the fuel gauge light is on, a reminder that gas is needed as soon as possible. At this point some people decide to wait to and save a few minutes and get the job at hand completed. Watching the “miles remaining” dwindle on the instrumental panel can be unnerving. When it reaches zero, panic sets in and pushing it any further becomes a gamble. Finally, after waiting until there are drops left in the gas tank, the car rolls into a gas station, running on empty.

The active Los Angeles County inventory has been running on empty all year long. There are fumes left in housing market’s tank. The inventory hit an all-time low in April at 7,185 available homes to purchase. It then climbed to 8,702 in mid-August and has dropped substantially since. In fact, it has shed 2,146 homes in the past three months, down an astonishing 25%. In just the past two weeks alone, the inventory plunged by 13%, or 981 homes, the largest drop of the year, and now totals 6,556, establishing a new record low and signaling the start to the Holiday Market when both supply and demand sink to their lowest point by New Year’s Day.

It is challenging to articulate just how dire the current inventory levels are today. In looking at supply and demand, when there is a very limited supply that is matched with insatiable, strong demand, the supply issue not only persists, but it can also become even more severe. That is precisely what has occurred in 2021. It has dropped to an unprecedented point.

Prior to COVID, from 2017 to 2019, the inventory averaged 12,001 homes. In 2020, it averaged 9,652, 20% less, and this year it is at 7,256 homes, 40% less. That is correct, it has averaged less than 7,300 homes. Last year’s 9,885 homes to end November was low for the time of year and close to the lowest level established in 2012 at 9,689. Today’s 6,556 inventory is 34% lower than last year. The 3-year average prior to COVID for the end of November is 11,752, a jaw dropping 79% more, an extra 5,196 available homes, nearly double. That is a big difference, indicating just how starved the housing market is for inventory.

Today’s inventory level really is a real challenge because, given current trends, it appears as if there is no change in site. It is not as if inventory levels will suddenly rise and cool the market. There are a couple of factors that have exacerbated the predicament. Prior to COVID, since 2012, there were fewer homes placed on the market compared to prior. Building an inventory was already challenging prior to the pandemic. When the pandemic hit, fewer homeowners opted to sell. In 2020, through October, there were 8,279 missing FOR-SALE signs compared to that 3-year average, 10% less. In 2021, through October, there have been 1,935 missing signs, 2% less. That may not seem like that many for a year, but at this point every single missing FOR-SALE sign further intensifies the inventory plight.

Another contributing factor is that demand has been extremely strong due to today’s historically low interest rate environment. According to Freddie Mac’s Primary Mortgage Market Survey®, today’s 3.1% rate may be higher than mid-August’s 2.77%, or the first week of January’s 2.65%, but it would still be a record low in comparing it to any time prior to COVID. For perspective, in 2019, mortgage rates averaged 3.94%. Low rates instigated the fire sale atmosphere in both 2020 and 2021.

Further contributing to demand, there are more potential buyers reaching the prime first-time buying age of 32 years old than ever before, millennials. It started last year, this year is even stronger, and it continues
for the next several years. It is the strongest first-time home buyer demographic patch on record, and it is occurring right now. Millennials are doing what humans do. They are leaving the family home or the multiple roommate situation, getting married, having babies, and want a piece of the proverbial “American Dream” just like every generation prior. They are adding pressure to the demand side of the equation for housing. 

Merge extremely strong demand with an anemic supply of available homes to purchase, a record low, and housing will continue to soar for not only the remainder of this year, but through 2022 as well. Today’s Expected Market Time has dropped to 34-days, its lowest level since March and just a couple additional days compared to the lowest level on record in April of 32-days. Anything below 60-days is considered a Hot Seller’s Market. When it drops below 40-days it has reached the level of an insane market. At 34-days, housing is nearly indescribable. It is where every home is greeted with a ton of showings, sellers get to call all the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly.

The Bottom Line: The supply of available homes to purchase is at an all-time low. The inventory gauge is pointing to “EMPTY”, and it does not look like there will be much relief anytime soon. The Los Angeles County housing market has only grown stronger over the past few months and has been at an insane level since the start of this year. Do not expect anything less than insane for quite some time.