Our last recession was characterized by a depressed housing market. However, the opposite appears to be true as we make our way through the 2020 recession. Low home inventory has led desperate homebuyers to snatch up homes the moment they arrive on the market.
Nationally, the average days on market is just 16 days before selling, as of September 2020. This figure has declined fairly consistently since its most recent peak in January 2020, when the average home sat for 42 days. For a more seasonal reference, one year earlier in September 2019, the average home was listed for 29 days before selling compared to today’s 16.
Days on market is typically lower for low-tier homes, where inventory is often tight, with high-tier homes spending the longest on market before selling. Further, inventory swings are more varied based on individual metropolitan areas and neighborhoods.
Here in California, the average days on market is well below the national average, at just:
- 14 days in San Jose;
- 13 days in Los Angeles;
- 11 days in Riverside;
- 11 days in San Francisco;
- 8 days in San Diego; and
- 7 days in Sacramento.
The rapid sales occurring across the state reflect California’s inventory crunch. Seller uncertainty and the foreclosure moratorium are both acting to keep listings off the market in 2020. As of the first week of November, multiple listing service (MLS) inventory is down compared to a year earlier:
- 6% in San Jose;
- 10% in Los Angeles;
- 39% in Riverside;
- 35% in San Diego; and
- 38% in Sacramento, according to Redfin.
The only metro to buck this trend is San Francisco, which has 52% more inventory available than a year earlier as of November 2020. This city’s housing market is already volatile in a typical year. In 2020, the remote work trend is growing and the area’s high cost of living has seen fewer interested homebuyers now that remote workers may search further away from the expensive city center.
An inventory shift is approaching
A word of advice to today’s real estate professionals: don’t get used to it.
The reason for today’s low inventory situation is multi-faceted, and most of these factors are set to change in the coming months. For example, 5.5% of mortgaged homeowners are in a mortgage forbearance plan in November 2020, according to the Mortgage Bankers Association (MBA), and roughly one-third of these homeowners do not have a high level of confidence that they will be able to pay next month’s mortgage payment.
While an increase in households unable to make payments usually leads to foreclosures and an influx in inventory, 2020’s eviction and foreclosure moratoriums have put this inventory on (temporary) hold. When the federal foreclosure moratorium ends — currently scheduled to happen on December 31, 2020 — lenders will begin the foreclosure process for those behind on their mortgage payments and today’s shadow inventory will jump.
Another factor contributing to today’s low inventory is the pandemic, which caused homebuyers to pause their plans this spring. In turn, homebuyers who desired to purchase earlier in the year are buying in the fall. Thus, home sales have been unseasonably high in summer and fall 2020, somewhat making up for the losses experienced earlier this year.
Further, since residential construction has slowed significantly during the pandemic response, MLS inventory has relied more on the willingness of sellers and less on builders.
However, these three factors are fleeting:
- the foreclosure moratorium will lift and distressed sales will begin to flood the market in 2021;
- the unseasonably high homebuyer demand seen in fall 2020 will subside, as it is merely holdover from earlier in the year; and
- construction will pick up with the relaxation of social distancing measures following deployment of a COVID-19 vaccine in 2021, helped along by legislation encouraging more building.
Once these market forces are muted, expect the housing market to feel the real impacts of the 2020 recession. An inventory spike will lead to longer days on market, price cuts and lower home values in the second half of 2021 and through 2022. Once prices begin to fall consistently, homebuyers will quickly exit, unwilling to purchase until prices have bottomed. At that point — likely around 2023 — speculators will return, competing with homebuyers for inventory and injecting momentum into the next price bump.