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As we prepare for 2021, the top concern on every real estate agent’s mind is the low levels of housing inventory. A combination of global and national factors have driven inventory levels down to record lows this year: the coronavirus pandemic, increased buyer demand, historically low interest rates and continued population growth. 

Housing inventory at a national level has steadily declined in the last year. Since October 2019, inventory supply has stayed below five months, with the biggest decline occurring since May 2020 when supply dropped to 2.6 months. 

Copyright ©2020 “November Existing Home Sales.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. January 6, 2021, https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales

Total existing home sales dropped early this year at the beginning of the COVID-19 pandemic and subsequent lockdown, by as much as 26.6% in May 2020. However, in the last five months, total existing home sales have steadily increased as buyer demand continues to grow. 

What’s Happening in Central Iowa?

We’re seeing the challenging combination of low supply and high demand here in Central Iowa. We pulled data for the Des Moines area (including surrounding suburbs and Pella) and Ames going back to January 2015. These numbers only include single-family resale homes.

housing inventory
housing inventory

Sources: Des Moines Area Association of REALTORS® and Central Iowa Board of REALTORS®

The supply of active listings has steadily decreased in Central Iowa since 2015, despite small spikes during the busiest times of the year, while the pending ratio has steadily increased. Inventory levels in Central Iowa reached a new low in December 2020.

housing inventory
housing inventory

Sources: Des Moines Area Association of REALTORS® and Central Iowa Board of REALTORS®

The coronavirus pandemic and subsequent recession certainly haven’t helped these factors, but the low inventory didn’t start in 2020. This data shows us that the low inventory and high demand challenge in our markets has been building for several years. What can bring inventory back in 2021?

The 3 Ways Housing Inventory Could Return in 2021

We typically see inventory levels bottom out at the end of the year as sellers typically take a break through the winter months. Few are motivated to leave their homes on the market during the holidays and winter months due to inconvenience. Home sales typically realize the lowest returns during the end of the year. Some sellers will relist their properties in the spring but we usually don’t see new entrants to the market right now. 

As we go into the spring with high buyer demand, we anticipate that inventory will start to appear. The problem is, with such high demand, as quickly as it appears, it will disappear. Inventory will start to come into the market but we likely won’t see inventory levels rise in any significant way. 

So what will help “boost” housing inventory levels in 2021? We anticipate three potential sources of inventory return this year.

1. Sellers who see opportunity.

There has been a consistent and significant appreciation of home values over the last six years. CoreLogic reports that nationally home values appreciated 7.3% in October 2020 compared to October 2019, the fastest annual appreciation since 2014. Most major housing entities predict that home values, and therefore prices, will continue to rise over the next 12 months at an average of 3-5%.

Source: November 2020 Monthly Market Report from Keeping Current Matters.

We’re also reaching record-high levels of equity. According to CoreLogic, equity levels are at all-time highs with an average equity gain of $17,000 per homeowner (or 10.8% year over year) since the third quarter of 2019. This is the highest average equity gain since 2014.

housing equity

Source: “Home Equity Reaches Record Highs: Homeowners Gained Over $1 Trillion in Equity in Q3 2020, CoreLogic Reports.” CoreLogic®, December 10, 2020.

Overall, people are moving less as they spend more time in homes that are gaining value. They’re taking out less home equity lines of credit, staying in their homes longer and not pulling cash out against that value. 

However, homeowners who have more equity than ever will ultimately start thinking about how much they can make selling their house, even if they don’t have any major life changes motivating a potential move. People will look at their equity and rising home values and ask, “Should I realize this growth and sell my house?” 

As a result, we could expect to see a rise in the “make me move” mentality. Many homeowners might be open to selling for the right price. 

With inventory as low as it is, listing homes for slightly inflated prices actually produces somewhat surprising results. Properties are selling for prices we would not have seen in a normal market. There are savvy homeowners out there who might list their homes in order to take advantage of a perfect convergence of factors: ridiculously low inventory and incredibly high buyer demand as a result of historically low interest rates and people needing new homes as a result of the pandemic

2. “Distressed” inventory with equity. 

During the 2007 housing collapse, homeowners couldn’t make their mortgage payments after buying homes at premium prices. Those homes lost value as a result of the collapse which left people upside down in their homes and unable to make mortgage payments. They had to make the hard choice to either walk away and foreclose or work with their bank on a short sale. This resulted in a surplus of distressed housing inventory. 

As we come into the 2021 market, there are different circumstances with distressed inventory. Today, we have people who are unemployed as a result of the pandemic. They haven’t been able to make mortgage payments but have been assisted by the CARES Act’s foreclosure moratorium and forbearance programs. Although the foreclosure moratorium was recently extended through January 2021, the assistance programs will come to an end and homeowners’ mortgages will come due. 

mortgage forbearance

Source: Mortgage Bankers Association and December 2020 Market Report from Keeping Current Matters.

According to the Mortgage Bankers Association, most homeowners were paid in full when they exited their forbearance plans in recent months. Some homeowners will be able to work with their loan providers to add the missed months to the end of the life of their loan (essentially extending their loan terms for the number of months it was in forbearance). Others will have to work with their providers to make up missed months of payments and get current. 

Those who can’t, approximately 14.7% of the homeowners in forbearance, won’t be upside down in their mortgages but will have to sell their homes to cover the losses. 

The biggest difference between now and 2007? Homeowners now have notable equity. Their best bet is to sell their home, pay off the mortgage and make some money. As a result, some housing inventory will return in the form of “distressed” inventory. 

3. The end of COVID-19 disruption.

The odds are good there will be no real “end” to COVID-19. We will have to live with it as a regular part of life like so many other diseases. But with vaccines, resulting herd immunity, and continued safety precautions, the impact of COVID-19 in sidelining people who otherwise would be buying homes but have stayed put will end. 

People will also come to some of the realizations that many of us did during the first round of quarantines. The hallmarks of our new world – Zoom meetings, work from home, the need for extra space at home, the desire for outdoor space – none of this will end. The world has fundamentally changed and people’s needs and values are different and our way of living has permanently changed. 

The most popular home renovation this year was the addition of home offices. People are moving to small towns and rural areas more than ever looking for bigger homes and wide-open spaces. We know there are a lot of people who would like to move because they need or want something different for their home but didn’t because of the pandemic. As the world normalizes and COVID-19 becomes “manageable”, we will likely see an increase in the number of people willing to put their homes on the market. 

At the end of the day, it’s an interesting time for homeowners to list their homes. Sellers have the unique opportunity to see if they can realize an unbelievably high sale price for their homes. 

Up until now, we’ve asked, “How low can inventory get?” Let’s now ask, “What will bring inventory back?” While we don’t expect to see major or immediate increases in inventory levels in 2021, we are hopeful and expect to see a steady increase in the number of sellers willing to list their homes due to the factors listed here. As living in a world with COVID-19 becomes more normalized and as sellers realize the value of their homes’ equity, more and more people will participate in the housing market this year. 

Looking for more updates on the market? Click the button above for housing market reports for Central and Northeast Iowa.