Explained: The True Story About US Housing Inventory

A detailed analysis of the inventory situation in the new and existing single-family housing market.

The US Housing Market has been facing a record inventory crisis over the last four years…but the situation is changing rapidly.

There is also a lot of false information about the US housing market and the level of inventory, so in this article, we’ll uncover the true inventory situation across the entire US housing market.

We’re going to examine the differences between the existing home market and the new home market, show the best inventory measure to follow and highlight what it says now, and then outline what this means for the US housing market and the broader US economy going forward.

In order to get the most accurate reading on the US housing market inventory situation, we need to consider both supply and demand. Supply, in this case, is the level of inventory for sale, and demand is the current pace of sales volume.

If we start with sales volume, we can see that the existing home market sells roughly 3.7 million homes per year while the new home market sells 619,000 homes per year.

Right off the bat, we can see that the existing home market is almost six times larger in terms of sales volume than the new construction market.

Both of these markets, existing and new, have seen a huge reduction in sales volume or buyer demand since interest rates have increased as affordability moved out of reach for most people.

If we take this annual sales pace and divide it by 12, we can get an idea of the average sales pace per month. Of course, there are seasonal patterns, but if we normalize for those effects, we can see that the current monthly sales pace in the existing home market is roughly 309,000, and the new construction market is selling about 51,000 homes per month.

At the peak of the housing boom during the pandemic, the existing home market had a sales pace of 500,000 units per month and the new construction market was nearly 90,000 units per month.

Now that we have an idea of the current level of demand, we have to examine supply, or the level of inventory available for sale.

In the existing home market, there are currently 1.1 million homes for sale, one of the lowest on record if we just look at inventory alone. In the new construction market, there are 479,000 units for sale, one of the highest levels on record, only surpassed by the housing bubble of 2007.

You can clearly see how there is nuance to this situation of US housing inventory.

The best measure of US housing inventory takes into account both supply and demand and is called the months supply – in other words, how many months of inventory are available for the current pace of sales volume?

So if we take the current level of inventory for both the existing home market and the new home market, and we divide it by the current monthly pace of sales, we can see how many months it would take to sell all the inventory at the current pace of sales.

In the existing home market, that months supply figure, or the inventory level divided by the sales volume is 3.7. In the new construction market it is 9.3.

Generally speaking, the 5.5 to 6.0 level is considered a balanced market where there is no significant upward or downward pressure on prices. When the months supply level is below 5.5, that means there’s very little inventory available for today’s market conditions and prices generally rise. On the flip side, a high level of months supply means there’s too much inventory and prices must fall.

The existing home market has a monthly supply of 3.7, which is very low, but it’s been increasing since the absolutely historic level of 1.6 in January 2022. Never in the history of the US housing market has the months supply of existing homes been that low, creating a very unhealthy situation.

The inventory situation in the existing home market is still very tight but it’s now at the highest levels since before the pandemic.

The new construction market is a different ball game with months supply at 9.3, super high, and way above the balanced 6.0 level. There is way more detail to this situation in the new home market that we’ll uncover in just a moment.

If we look at the total US housing market situation, both existing and new construction, the aggregate months supply figure has increased to 4.5. So yes, the total inventory situation is still very tight on a national level, but it is rising and at the highest point since 2015.

The monthly numbers are volatile so lets look at the yearly averages to make things more clear. This shows the total months supply for the total US housing market by year. 2024 is a partial year and the current level in May 2024 is also noted in the chart.

As of May 2024, the total monthly supply situation is 4.5, which it has not been since 2015. You can also see the four years where the total months supply was below 4.0, which is extremely tight, and the 2021 situation at 2.6, which was crazy unhealthy.

One major point is that this current 4.5 level is the national average, but as we know, real estate is very regional. This means that some markets are near a month's supply of 6.0 and feeling price pressure, while some markets are still down at 3.0 and seeing prices rise with multiple offers.

The new home market, with a months supply up at 9.3, is way above the balanced 6.0 level and there are price cuts and discounts in that market. In June, the National Association of Homebuilders reported that 29% of builders cut home prices with an average price reduction of 6% and 61% of builders used sales incentives like mortgage buydowns to boost sales.

But we need to discuss the new home market and the 9.3 level of inventory in a bit more detail because there is more to that market than meets the eye.

The new construction market has 479,000 units for sale and a sales pace of about 50,000 per month. However, a home could be listed for sale when it’s completed, under construction, or not yet started.

If we look at the percentage of inventory that is completed, we can see that of those 479,000 new home units for sale, only 20% are completed, which means 80% are under construction or have not yet started. The percentage of completed inventory for the new construction market fell below 10% during the most acute part of the US housing shortage.

Normally, between 20% and 30% of new construction inventory is completed. During really bad downturns like 2008, builders were sitting on almost 50% completed inventory, which led to dramatic price cuts and big layoffs of construction crews.

The level of completed inventory is now back in the normal range at 20% and rising, which means that if we move towards 30%, price cuts will intensify, and construction crews will be at high risk of job losses.

If we take the currently 50,000 new home sales pace and divide that by the amount of completed new home inventory for sale, we can see that there are currently about 1.9 months of completed inventory for sale, which is getting past average and into the range consistent with recessions and job losses for construction crews.

This elevated and rising ratio speaks to how depressed sales volume, or demand, is for the housing market at today’s prices.

If the homebuilders have a large inventory of completed new homes for sale, they won’t apply for new building permits and build even more homes, and that’s exactly what we’re starting to see.

Building permits for new homes fell dramatically since the start of 2022 but then rebounded as homebuilders hoped for lower interest rates and more buyer demand. As interest rates remained elevated and buyer demand never rebounded, the amount of completed inventory builders have is rising, and new building permits are declining again.

So, the true inventory story in the US housing market is still one of tight or low inventory on the surface, but it’s changing quickly. Total months supply is up to 4.5, which is the highest level since 2015, and since real estate is regional, some markets are feeling price pressures.

The new home market has a growing share of its active inventory completed, which means price cuts and discounts will get larger, and unless there’s a huge pickup in buyer demand, they are also going to stop adding new building permits and potentially start laying off construction crews.

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