The Myth of the US Housing Shortage

The Myth of the US Housing Shortage

The US Housing Market is in a "dead zone" right now in 2023. It's an unpleasant market for both buyers and sellers.

The main driver of this dead zone is a severe shortage of inventory. With data from showing only 564k active listings on the market in April. A figure which is still 50% below pre-pandemic levels.

Inventory on the Housing Market measured 564k listings in April 2023.
Inventory on the Housing Market is still 50% below pre-pandemic levels (Source:

This inventory shortage is causing home prices to go back up this Spring, even in the presence of record low demand. Leading many realtors, investors, and housing pundits to proclaim that home prices won't crash due low inventory.

But they're wrong.

The notion of a "US Housing Shortage" is a complete myth. A myth that will cause the entire system to collapse on itself because:

1) America has more than enough homes to house its population at affordable prices and rents,

2) the actions of the US Government and Federal Reserve created an artificial shortage of houses, and

3) all the "shadow inventory" on the US Housing Market will be eventually released and cause prices to drop by more.

In this article I will walk you through the data on these points. And show you when to expect the artificial shortage to be resolved and home prices to drop.

Step 1: Understand the difference between Structural and Cyclical Inventory

If you're a homebuyer or real estate investor trying to understand the US Housing Market, one of the most important things to understand is that there are two types of housing inventory.

(1) Structural Inventory measures the actual housing stock that exists in America. That is, how many homes there are across the country. And how many homes are being built. Meanwhile, (2) Cyclical Inventory measures the number of homes listed for sale on the market at a given time.

According to the US Census Bureau, there are 97 Million owned homes in Structural Inventory on the US Housing Market.

Meanwhile, they count only 662k as listed for sale in Cyclical Inventory.

Meaning that only 0.7% of the total Structural Housing Stock is listed for sale right now.

There are 97 Million Houses in America. Only 660k are listed for Sale.
Only 0.7% of the owned-homes in America are listed for sale in Cyclical Inventory (Source: US Census Bureau)

Which is crazy. Fewer than 1 out of 100 houses are listed on the market. Showcasing the cavernous gap that exists right now between Structural and Cyclical Inventory. A gap which is more frustrating when one considers that there are 12 million houses currently sitting VACANT.

These are often second and third homes reserved for seasonal use. Or an investment property that the landlord isn't in a rush to rent. Or perhaps its an Airbnb.

The number of vacant owned homes in America is 18x higher than the number listed for sale in Cyclical Inventory! This "shadow inventory" creates huge potential for inventory to increase in the future.

Step 2: The Inventory shortage created an unstable system.

The result is a very unstable system. With historically low inventory levels needed to support historically high prices.

Home prices in America today are nearly 2x higher than the long-term, inflation-adjusted average since 1890. The Housing Bubble today is the biggest of all-time, even bigger than the one in the mid-2000s.

Some people claim that this Bubble is "justified" due to the shortage of houses in America. But remember - there is no structural shortage of houses in America.

In fact, America has more houses than it has ever had relative to the size of its population. With today's Housing Unit / Population Ratio of 0.43 measuring as the highest level of all-time going back to 1965.

There is no Housing Shortage in America. Housing / Unit Population is at an all-time high (Source: US Census Bureau)

That's calculated by dividing the 143 Million Housing Units (owned+rented) in America by the total population of 334 Million. Indicating that there are plenty of houses and apartments to go around for the people that live in this country.

The trouble today is that the average person is now consuming more housing than they were three years ago. An unsustainable situation which is a direct consequence of US Government intervention in the Housing Market.

Step 3: The US Government "locked" up Inventory through Foreclosure Moratoriums.

The policies of the US Government and Federal Reserve over the last 3 years have been a master class in how to destroy, manipulate, and distort a normally well-functioning housing market.

In terms of the US Government - their foreclosure moratoriums during the pandemic suppressed inventory on the US Housing Market when it needed it most. Despite a huge increase in mortgage defaults that occured in 2020 (with the 8% pandemic default rate nearly matching the peak set during the last crash), there were no foreclosures. In fact, foreclosures went down from their pre-pandemic levels.

Comparing Mortgage Defaults to Foreclosures in the US Housing Market.
Foreclosure bans prevented nearly 2 million foreclosures during the pandemic (Source: MBA / Biden Administration)

And while we can sit here and have a long debate about whether these moratoriums were a good or bad idea, the reality is that they likely suppressed inventory by 500k just by reducing the normal, pre-pandemic level of foreclosure activity.

But not only that. If the full extent of the mortgage defaults that occurred during the pandemic would have been allowed to translate into foreclosures, an additional 2 million homes (according to the Biden administration) would have hit the market over the last three years. Meaning inventory today would be 3-4x higher than it is now if the foreclosure moratoriums were never instituted.

Step 4: The Federal Reserve lowers rates, causing Investors & 2nd Home Buyers to go wild.

While the US Government was actively working to reduce the supply of homes for sale on the market, the Federal Reserve was working to increase demand.

They pushed short-term interest rates to zero during the pandemic and bought trillions in Mortgage-Backed Securities. Mortgage rates plunged below 3%. Causing a flurry of speculative home-buying activity from investors and second home buyers.

Data from Redfin shows just how much the Fed's policies favored wealthy people buying second homes. Mortgage rate locks for second homebuyers surged +89% from their pre-pandemic levels in 2020 (red line). And stayed elevated for two years.

Low mortgage rates caused a big increase in second-home purchases during the pandemic (Source: Redfin)

The good news is that higher mortgage rates over the last year have caused a sharp reversal in this trend. However, a significant amount of damage was done to inventory levels through the huge surge in second home purchasing. And now many of those homes are sitting vacant in "shadow inventory".

It's a similar story with Investors. Every Tom, Dick, & Harry wanted to become a real estate investor during the pandemic due to increasing prices and low interest rates. The result was a massive spike in investor purchasing in 2020 and 2021 that depleted the housing market of inventory.

Data from Redfin shows the trends in investor home purchases during the pandemic.
Investor home purchases surged during the pandemic. And are now coming back down. (Source: Redfin)

And like with second-home buying: the trend is reversing. Which is good news. But once again - the damage has been done. Two years of insane speculative investor purchasing has now left many homes sitting vacant on the market for rent. When they could be listed for sale instead.

Step 5: A sizable increase in the Unemployment Rate will trigger the collapse.

How does this over-consumption of housing caused by the US Government and Federal Reserve revert to a more normal level of consumption, thereby increasing cyclical inventory and crashing prices?

Higher unemployment.

Right now the unemployment rate in America is at a record low 3.4%. And so long as it stays at these historically low levels, it will be difficult for the Housing Market to go through the correction that it needs. Because quite simply - people don't want to give up their over-consumption of housing.

Wealthy people who bought second and third homes like having those homes. Especially at 3% mortgage rates. Investors who bought rentals like having those rentals. Even if they are struggling to rent them out and barely break even. A homeowner who is struggling to make their mortgage payment might decide not to sell because they expect to get a raise next year.

The one thing I've realized in tracking the Housing Market over the last several years is that people won't sell if they don't have to. Rather, people need to be forced to sell. Which is what a surging unemployment rate will do.

Some wealthy people will develop liquidity needs and won't be able to afford payments on multiple homes. And they'll have to sell.

There will be investors who get sick and tired of operating rentals at break-even or negative cash flow. And realize they're better off selling as they see rental rates declining further in their market.

The "house poor" homeowner who can barely afford their payments because they're at a 40-50% debt-to-income ratio might lose their job. Or have their hours cut back. And all of a sudden selling the house becomes a better prospect than losing it outright to foreclosure.

Step 6: Unemployment Rate hits 7.0%. Mass selling ensues.

The magic number I'm looking at for the unemployment rate is 7.0%. If it crosses that threshold, I think we will see mass selling on the US Housing Market.

Here's the math on that. Currently, at a 3.4% unemployment rate, there are 5.7 million unemployed people in America. If the unemployment rate surges to 7.0%, that would more than double the unemployed to 11.7 million.

An additional 6 million in unemployed would significantly increase forced selling pressure. In the table above I assume that 10% of the additional unemployed are forced to sell, which I believe is a conservative estimate. Which would increase inventory by +600k in this hypothetical scenario.

Causing inventory on the US Housing Market to more than double and return to the pre-pandemic levels of about 1.2 million.

Which I believe would cause a large reduction in home prices.

The cases of cities like Austin, TX and Boise, ID prove that point. All it took in these markets to cause a 15-20% drop in prices was for inventory to return to 2019 levels.

Step 7: But wait...what if the Unemployment Rate doesn't go up?

Many people, including myself, have been predicting a recession and subsequent increase in the unemployment rate for 12 months. And so far it hasn't happened.

The resulting "recession fatigue" is now causing many to think it won't happen. And that "this time is different". And that America's economy will miraculously maintain a low unemployment rate through a sea of headwinds that include record inflation, rising interest rates, a banking crisis, and huge debt.

But this time isn't different. At some point the unemployment rate will spike and the recession will get worse. It always does.

There have been 12 distinct recessions in America since 1948, with the lowest unemployment rate occurring in these recessions measuring 6.1%. The average is 8.4%.

The US unemployment rate is currently 3.4%. In recessions it typically surges north of 6%.
History of the US Unemployment Rate going back to 1948. (Source: BLS / Fred)

The good times always end. And when they do, millions become unemployed. Causing tumult in the housing market and stock market. I'm not telling you this to scare you. I'm telling you this because it's the truth. A truth many in the housing market and overall economy want you to forget in 2023.

Last Step: Understand the risk factors in YOUR CITY

Reventure App has two data points that I think you should dig into to understand the inventory risks in your market.

The first is a data point called "Inventory as % of Houses". Which is under the Real Estate data points. This metric shows the percentage of owned houses that are currently listed for sale.

States measured by Inventory For Sale as % of total Owned Houses (Source: Reventure App)

You can see Florida has the highest relative inventory levels at 1.3%. Followed by Nevada at 1.2%. And Texas and Idaho at 1.0%. Markets with more homebuilding and investor activity will have higher cyclical inventory levels.

Meanwhile, markets across the Northeast/Midwest have very low levels of Inventory. In Ohio only 0.3% of all the houses are currently listed for sale.

These extremely low inventory levels in Ohio scare me a bit. Because it means that a small increase in unemployment and forced selling could cause a big shift in the market.

Another metric you should be tracking on Reventure App is "Shadow Inventory". This metric looks at how many vacant homes for seasonal and recreational use there are in a market as a % of the total owned houses. This data point can be found under the Premium Category.

Shadow Inventory as a % of Owned Homes (Source: Reventure App)

Florida pops up once again. Which is scary. Because not only does Florida have the most inventory on the market today, it also has the 4th most shadow inventory. Indicating potential for a deluge of homes to be listed in a recession.

New England is also interesting. Maine and Vermont have over 1/5 of the homes in the state sitting vacant. Let's watch how that turns out in subsequent years.

Thank you for reading. Please leave feedback in the comment section below.

This might be my longest article to date, clocking in at nearly 2,400 words. Please let me know in the comments what you think of it. And provide some updates on what you're seeing with inventory in your Housing Market.