We don’t see any relief on the horizon, and in fact, there are really only three ways for there to be a net increase in inventory. The first is new construction, and while construction permits have increased, there is an estimated shortfall of overall 50,000 units over the next five years just to meet new household formation. The second way for there to be a net increase in inventory is investors who opt to sell units that they have been holding as rental properties. With rents rising faster than home prices, there is no market pressure for that to happen. The third is homeowners leaving the area who decide to sell their residence. While residents are always leaving the Washington area, it is still attracting more people than it is losing.
This is not to minimize the impact of current homeowners who sell and buy another home in the area, but that doesn’t create any net increase in inventory. On top of that, the current low inventory climate actually discourages some from moving. While they may be confident they can sell their current home, they lack confidence they can find their next one with relatively few homes on the market.
There is always speculation that there will be a substantial increase in inventory when there has been a major “change” election like the one we just experienced. Historically, that simply has not been the case. Even though there will be turnover in roughly 5,000 jobs between the White House and Capitol Hill, many of the individuals who will fill those jobs already live here and many of those vacating will stay. It also takes a year or more to fill all those jobs, so the minimal impact on inventory is extended over a long period of time.
There is an undeniable fact that is keeping a lid on movement by existing homeowners: People are staying in their homes longer than previous generations. In its 2016 Profile of Home Buyers and Sellers, the National Association of Realtors reported that the median number of years sellers remained in their home was 10 years — up from six years. That is a seismic shift. A big part of that jump is the simple fact that many could not move — even if they wanted to — during and in the aftermath of the crash of the real estate market that started in 2006. But even as equity has returned to the overwhelming majority of the nation’s homeowners, they just aren’t in a big hurry to sell.
Economist Elliot Eisenberg summed up the impact of this demographic trend in a recent ECON70.com blog post: “The percentage of Americans that moved fell to an all-time low of 11.2 percent in 2016 from a peak of 42 percent in the early 1950s. Numerically, moving activity topped out in 1984 at 45 million and has steadily fallen to 35 million today — the same level as in 1962.” The population of the United States was 186 million in 1962; today it is over 324 million.
When people don’t move as often, inventory is going to suffer.
The Washington area is certainly more transient than the nation as a whole, but we’ve seen our “seller tenure” change as well. In 2000, the median number of years a seller was in their home was 6.5 years. So far in 2016, it is 8.5 years.
We know this period of tight inventory won’t last forever, but there are some fundamental reasons it won’t change anytime soon.
David Howell, executive vice president and chief information officer at McEnearney Associates, writes an occasional column on the Washington-area real estate market.