Low housing inventory has plagued the real estate market for many years making it difficult for families to move into their first or next home. As of March, there are only 11,106 homes on the market in the Chicago area. By comparison, 10 years ago in April 2014, there were 43,173 homes for sale in the Chicago area. The National Association of Realtors® estimates that the US is short 7.2 million homes. By the simple laws of supply and demand, the lack of homes for sale or rent drives up the price. Competition for homes is fierce, with bidding wars commonplace. So what’s behind the low inventory? Here are some of the main reasons:
Population Increase: Last year the US population increased by over 1.8 million and as the population of the US increases steadily each year, demand for housing increases as well. From 2012 to 2023 over 17.2 million households were formed but only 13.4 million housing units were completed. Stories about the decline in the Illinois population are common but in the Chicago area, the population is still increasing at .53% per year to a total of about 8.9 million.
Fewer Homes Being Built: Home-building activity plummeted during the 2008 housing crisis and remained depressed for years, contributing to a historic decline in the construction of new homes and a housing shortage. According to Hines data quoted in Axios, Chicago needs 142,000 more homes to meet residents’ needs. Recently, home builders have backed off because of rising interest rates. In March, US housing starts dropped 14.7% to a 5-month low. To remain in business, homebuilders must carefully manage inventory so they don’t build more homes than they can sell.
The Interest Rate Trap: CNBC reports that 82% of homeowners feel locked in by their existing low-rate mortgage. Millions of Americans who refinanced or bought homes when mortgages hovered around 3% are now reluctant to trade low rates for a 7% mortgage. As rates increase, these homeowners are caught by the “golden handcuffs” of low rates. Most economists expect the Federal Reserve to cut rates later in the year. With rates expected to be in the 6% range housing should pick up.
Boomers Staying in Place: About 28% of all US homes with 3 or more bedrooms are owned by people between the ages of 60 and 78, according to the Wall Street Journal. Millennials living with children own only about 14% of these larger homes. A recent survey of Americans 60 and older reveals that they don’t ever intend to move. Boomers own half of all the $32 trillion in US home equity and if they move, they face big capital gains taxes and higher mortgage rates. More than half of Boomers have no mortgage and many seem to intend to stay put for now.
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