Inventory Vanishing and Bidding Wars Exploding in Crazy U.S. Housing Market

Episode Summary

Executive Summary: The episode examines why the U.S. housing market remains intensely competitive despite the pandemic easing: decades of underbuilding, historically low mortgage rates, strong millennial demand, and policies that discourage selling have shrunk inventory. Guest Mike Simonson argues that most investment ownership is by individuals, not institutions, and that rising rates may slowly normalize supply, but only over years.

Main Topics: Chronic housing inventory shortage (Priority: 5/5): Mike Simonson explains that U.S. single-family inventory has been falling for a decade, intensified by the pandemic, leaving far fewer homes for sale than normal and fueling bidding wars. Low rates and the incentive to keep existing homes (Priority: 5/5): Cheap 30-year mortgages make it financially attractive to keep the first home as a rental when buying another, reducing resale supply and turning many owners into small-scale landlords. Millennial demand and demographic pressure (Priority: 4/5): A large millennial cohort has entered peak homebuying years, creating strong underlying demand that collides with constrained supply. Individual investors vs. institutional buyers (Priority: 4/5): The discussion distinguishes between media attention on private equity and the reality that most investment single-family ownership comes from individuals with one to four properties. Rising rates, affordability, and market normalization (Priority: 4/5): Simonson argues that higher mortgage rates cool bidding wars over time by reducing affordability and discouraging owners from keeping multiple low-rate mortgages, but the adjustment is gradual. Construction lag and future supply relief (Priority: 3/5): Builders are responding, but new construction takes time due to permits, land use, and building delays, so relief from added supply will arrive slowly.

Key Arguments: Inventory is at historically low levels, down from roughly 1.2 million homes to 284,000 single-family homes on the market, which is the central driver of bidding wars. Low mortgage rates reduce the cost of carrying an existing home, making it easy for owners to keep their first house as a rental when they buy another, pulling homes out of the resale market. The housing shortage is not just a pandemic story; it reflects a decade-long decline in available resale homes after the financial crisis and years of underbuilding. Millennials entering peak homebuying age create structural demand that meets constrained supply, intensifying competition across price points and geographies. Many “investment properties” are not owned by giant funds but by individuals; investor ownership is estimated using title-address differences and is mostly individual rather than institutional. Rising rates can increase supply and reduce overbidding, but the effect is delayed because existing homeowners have strong equity, low default risk, and no strong reason to sell immediately. The mortgage quality in this cycle is much stronger than in the mid-2000s, with high credit scores and better lending standards, so the situation differs from the 2008-era bubble. New construction is underway, but because housing supply responds slowly, the market will likely take multiple years to move back toward a more balanced state.

Data Points: Single-family homes on market: 284,000 - Mike Simonson’s estimate of current U.S. inventory at the time of recording Homes available a decade earlier: About 1.2 million - Approximate inventory level cited for January in the pre-pandemic era Homes taken out of resale cycle over the last decade: 8 million - Simonson says homes shifted into investment/rental ownership Investor ownership share: Low twenties percent - Share of purchases estimated to be investment properties Individual investors’ share of investment properties: About 90% - Simonson says one-to-four-unit investment homes are overwhelmingly owned by individuals Normal share of homes with price cuts: About one-third - Rule of thumb in typical markets before sale Hot market share of homes with price cuts: 28% or lower - Simonson describes lower price-cut rates when demand is strong Peak frenzy price-cut share last May: About 15% - National level during the hottest phase of the pandemic housing boom Normal share of homes with price increases: About 2.5% - Typical proportion in normal markets, often due to flips or relisting strategies Rising-rate year price-increase share: About 2% - 2018–2019 period when higher rates cooled demand Pandemic peak price-increase share: About 6.3% - Last year’s frenzy, when many homes were relisted or repriced upward Mortgage rates cited as low-cost carry: 30-year fixed at 2.7% - Example of owners benefiting from locked-in low rates Inflation reference: 6% - Used to illustrate why a 2.7% mortgage is especially attractive Prop 13 context: Taxes based on a 1992 purchase can remain near that base - Example of California’s tax structure discouraging sales Annual construction pre-bubble average: About 1.5 million homes per year - Average new-home construction before the housing crisis Post-bubble construction pace: About 500,000 homes per year - Simonson notes a long period of underbuilding after the bubble 18/20 or 20-year normal inventory benchmark: About 1 million homes on the market in January - Simonson’s rough benchmark for a more normal housing market Seasonality shift during pandemic: Inventory kept falling until April 30 - Normally inventory starts rising in late January/February

Pivotal Quotes: "It is a decade long phenomenon for a few reasons. And then we threw the pandemic on top of it." — Mike Simonson: Summarizing that today’s housing tightness predates COVID and was worsened by it "We have taken 8 million homes out of the resale cycle and moved them into the investment rental part of the pool." — Mike Simonson: Explaining how owner behavior has reduced available homes for sale "The numbers I've seen on that are individual investors who own one to four units... it is overwhelmingly dominated by individuals." — Mike Simonson: Clarifying that most single-family investment ownership is not by large institutions

Implications: Housing is likely to stay tight and competitive for years, not months. Buyers may need to accept higher prices, work with strong financing, and understand that normalization depends on rates, construction, and eventual owner turnover.