Business & Investment

Will housing inventories recover in 2021?

It is a well-known fact that housing inventories are a major factor in the crazy price increases in the current housing market. There are many ways to measure home inventory, and almost all say the same thing.

Few homes are on the market among those who don’t want to sell their homes because of late builds, pandemics, foreclosure moratoriums from last year, and those who don’t want to enter the crazy buyer’s market once they sell their homes.

There are several factors that have driven recent purchasing enthusiasts (demand and low interest rates are the biggest factors), but it is unlikely that we will return to a more stable housing market with healthier growth without inventory recovery. is.

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Evaluate the current situation

When will inventory recover?I got the data from Red fin, A national real estate agent, uses the active list as a key indicator for forecasting inventory. The active list basically means the total number of properties listed that were active in a particular month.

Looking at the rest of 2021, we will enable investors to develop their own strategies for managing and expanding their portfolio. As you can see from the graph below, the list has decreased significantly compared to 2020.

When preparing to predict a time series (a dataset over time), you usually look for some patterns right away.

  • Trend: Is the data generally moving up and down?
  • Seasonality: Does the data follow a repeatable pattern over a specific time period?
  • Circularity: Does the data go through an unpredictable cycle of highs and lows?

Just by using the eyes, we can see that this data shows both negative trends and seasonality of the year.

It’s not that big, but you can see that the active list has already been on a slight downward trend in the last few years. Therefore, when talking about inventory “recovery”, I’m talking about returning to around (or a little below) the 2019 level.

Active list redfin line

The second thing to note in these graphs is the consistent seasonality of the data.

Seasonality really has nothing to do with the seasons. This means that the same pattern will appear in the data for a particular time period. Our analysis shows seasonality every year. The patterns of mountains and valleys are very similar each year. The active list is low in the first and fourth quarters and high in the second and third quarters.

Because of this seasonality, the first step in inventory forecasting is to predict what will happen to this year’s inventory if the seasonal pattern is maintained and nothing else happens. In other words, based on what we know about January-April 2021, will history tell us what will happen from May-December?

I created a seasonal index and predicted it. You can see the predicted number of green below.

Seasonal forecast

It doesn’t look good. As expected, we can see that inventories increase in the summer months and decrease again towards the end of the year, but we can’t really get close to the pre-pandemic location.

This type of prediction is usually sufficient. I use trends and seasonality, and some great statistical models to predict future inventories.

But we are not in the normal era. Unfortunately, all the fancy tricks I’ve learned don’t work here. Mathematical models need data that the model can train, but there is no data that can tell us about the moment. Instead, you need to use your intuition about the housing market to predict what will happen next.

To that end, we will incorporate three additional factors into our forecast: new construction, improved sales conditions, and foreclosure inventory.

New construction

Last year was a strange year for new construction. At the beginning of 2020, construction was at its highest level since the financial crisis. After that, the pandemic of COVID-19 became established, and it dropped rapidly to the level of 2014.

Housing begins

It takes about eight months on average for homes to hit the market. As of April 2021, we need to overcome the housing revocation that began at the beginning of the pandemic.

On the other hand, inventories due to housing starts in the latter half of 2020 have not yet come out. This gives me a reason to believe that new construction can increase inventories in addition to our seasonal forecasts.

There were about 1.37 million housing starts in August 2020, all of which should have been on the market around April 2021 with last month’s data. However, in March 2021, there were 1.73 million housing starts, 360,000 more than in August last year. So, relatively speaking, more new constructions will be on the market in eight months.

Foreclosure inventory

During the pandemic process, the government provided protection to limit foreclosures. This has led to the lowest ever foreclosure activity.

However, that alone does not give the whole picture. Millions of Americans are still participating in the tolerance program. That is, they are working with lenders to temporarily delay or reduce mortgage payments. It’s still unclear what will happen when the foreclosure moratorium ends, but personally, I’m not too worried about the foreclosure crisis.

Looking at the data, the number of tolerant borrowers is steadily declining. In March 2020, it was estimated that about 8% of all borrowers were tolerant. That number shrank to 5.5% at the end of 2020 and is now down to about 4.2%.Means An estimated 2.1 million borrowers are still tolerant.

Does that mean 2.1 million people are about to be seized? I do not think Mortgage Bankers Association, About 87% of the tolerant people made a repayment plan and ended the tolerance agreement, and the loan was revived.

This is great news as it means that not many homeowners are facing imminent foreclosures. These tolerance programs seem to work.

However, when the moratorium is lifted, foreclosures may increase. Assuming that 13% of the 2.1 million borrowers seized end the foreclosure without agreement with the lender, there will be approximately 273,000 loans facing the possibility of foreclosure.

Sure, not all of these loans actually face foreclosure, but this exercise uses a high estimate of 90%. It gives us 246,000 potential foreclosures. We do not know the timing of these possible foreclosures, so we plan to seize them evenly from July to December. Hopefully the actual number of foreclosures will be much smaller.

Sales conditions

The last factor I draw into the forecast is improved sales conditions. This is much more difficult to quantify and challenges the area of ​​guesswork.

What I want to do is quantify the motivation of homeowners to sell. Intuitively, it makes sense that people don’t want to sell their homes during a pandemic. We also know that many people are afraid to sell because they don’t want to be a buyer in this crazy market.

But I have to think that will change, and some recent data confirms me. In one recent surveyThe number of people who said it was a good time to sell increased from 61% to 67%.

Without other data to help quantify this effect, I modeled a 6% increase over the May-July seasonal forecast and an 8% increase from August-December 2021. did.

I raised it to 8% just by intuition. It’s not really scientific. I think it can actually accelerate faster, but I have no other data to support it, so I’ll stick to the numbers I have.

Final forecast

Combining all these factors, the 2021 forecast looks like this:

Dave's inventory forecast

We’ve broken down each element of the graph so that we can see where some of the increase comes from. My intuition says that improved sales terms will rise faster than this, but I’ll stick to the data I have now. Also, this graph shows that if I’m wrong and more homeowners are facing foreclosures, it doesn’t have much of an impact on total inventory.

In historical context, my model shows that in the summer it approaches inventory levels in 2020 and even exceeds the number in 2020 towards the end of the year. The forecast does not predict that inventories will be very close to pre-pandemic levels in 2021.

Ultimately, it is the number of existing homes (not new) on the market that actually increase inventory. Hopefully my predictions about improving sales conditions are overly conservative, which helps to accelerate faster and recover inventory faster than shown here.

What will happen after 2021 is even less clear. The start of new construction remains a big question mark. Higher prices for timber and other items can slow housing starts. This can certainly reduce inventory, even if sales conditions continue to improve.

Will housing inventories recover in 2021? Will housing inventories recover in 2021?

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