the US housing market has been facing a record inventory crisis over the last 4 years. But the situation is changing rapidly. There is also a ton of false information about the US housing market and the level of inventory. So in this video, we're going to 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 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 the existing Home Market has a sales pace of roughly 3.7 million homes per year, while the new Home Market has a sales pace of 619,000 homes per year right off the bat.

we can see how the existing Home Market is almost six times larger than the new construction market in terms of sales volume. 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 is 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 selling nearly 990,000 units per month. Now that we have an idea of the current level of demand, we have to look at supply or the level of inventory for sale in the existing Home Market.

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 the situation of US housing inventory. The best measure of US housing inventory takes into account both supply and demand and is called the month supply. In other words, how many months of inventory are available for the current pace of sales volume. 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 month 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 month's Supply level is below 5.5, that means there is very little inventory available for today's market conditions, and prices generally rise. On the flip side, a high level of month supply means there's too much inventory, and prices must fall. The existing Home Market has a month supply of 3.7, which is very low, but it's been increasing since the absolute historic level of 1.6 in January 2022. Never in the history of the US housing market has the month supply of existing homes been that low. This created a very unhealthy situation in the existing Home Market. The inventory situation in the existing Home Market is still very tight, but it's now at the highest level since before the pandemic. The new construction Market is a completely different ball game, with a month supply at 9.3, super high and way above the balanced 6.0 level. There is way more detail to the situation in the

new construction 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 month supply figure has increased to 4.5. So, yes, the total inventory situation is still very tight on a national level, but the level is rising and at the highest point since 2015. The monthly numbers are volatile, so let's look at a yearly average to make things more clear. This shows the month's supply for the total US housing market by year. 2024 is a partial year, and the current level as of May 2024 is also noted in the chart. As of May 2024, the total month supply situation is 4.5, which it hasn't been since 2015. You can also see the four years where the total month supply was below 4.0, which is extremely tight, and you can also see 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. So, this means that there are some markets that are near a month supply of six and feeling downward price pressure, while some markets are still down at three and seeing prices rise with multiple offers. The new home market, with a month supply of 9.3, is way above the balance level of 6.0, and there are price cuts and discounts in that market. In June, the National Association of Home Builders reported that 29% of builders cut home prices, with an average price reduction of 6%, and 61% of builders use sales incentives like mortgage rate buy-downs to boost sales. But we need to talk about the new home market and the 9.3 month supply level in a bit more detail because there is more than what meets the eye in the new construction market. Currently, there are 479,000 units for sale in the new construction market and a current pace of sales of about 50,000 per month in the new home market, 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 either under construction or not yet started. The level of completed new home inventory for sale fell below 10% during the most acute part of the US housing shortage. Normally, in 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 is what led to dramatic price cuts and big layoffs of construction crew. The level of completed inventory is now back into the normal range at 20%, and it's rising, which means that if we move towards 30%, price cuts will get more intense and construction crews will be at high risk of job losses. If we take the current 50,000 new home sales pace and divide that by the amount of

completed new home inventory for sale. We can see that there's currently about 1.9 months of completed inventory for sale, which is getting past the average level and into the range consistent with recessions and job losses for construction crews. If the home builders have a lot of completed new home inventory for sale, they aren't going to 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 home builders 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 as a result. So the true inventory situation in the US housing market is still one of tight or low inventory on the surface, but it's changing quickly. Total month supply is up to 4.5, which is the highest level since 2015. And since real estate is regional, some markets are starting to

feel price pressures. The new Home Market is having a larger share of their active inventory completed, which means price cuts and discounts will get larger unless there's a huge pickup in buyer demand. They're also going to stop adding new building permits and potentially start laying off construction crews.

US Housing Inventory Crisis: Its Impact on Home Prices

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