Why home prices are still rising even as inventories recover

There is currently a 4.4-month supply of both new and existing homes for sale, according to the National Association of Home Builders, or NAHB. Months supply is a common calculation used in the market to measure how long it would take to sell all available homes at the current rate of sales. A six-month offer is considered a balanced market between buyer and seller.

Supply was already low at the start of this decade, but pandemic demand pushed it to a record low by early 2021 with just two months’ supply. This shortage of homes for sale, combined with strong demand, has pushed home prices up more than 40% from pre-pandemic levels.

Now supply is finally starting to pick up, but the gains are mostly on the new domestic market, not on the existing side. In fact, there is now a nine-month supply of newly built homes for sale, nearly three times that of existing homes. The supply of new and old home months is usually tracked quite closely. New construction now makes up 30% of total inventory, roughly double its historical share, according to NAHB.

“June 2022 recorded the largest lead ever in months supply of new homes (9.9) over months supply of existing single-family homes (2.9),” wrote Robert Dietz, chief economist for the NAHB. “This separation makes it clear that an assessment of current market stock cannot simply look at either existing or new housing stock in isolation.”

This unusual dynamic is driven by both recent swings in mortgage rates and an unprecedented housing market crash that began 20 years ago.

This housing market is unlike any other because of economic forces unlike any other. First, in 2005, there was a huge increase in home sales, home construction, and home prices fueled by the rise of subprime mortgages and a frenzy of trading in new financial products backed by those mortgages.

All of this quickly collapsed, resulting in one of the worst foreclosure crises since the Great Depression and triggering the Great Depression that followed. Single-family homes plummeted from a high of 1.7 million units in 2005 to just 430,000 in 2011. By 2012, new homes made up just 6% of the total supply for sale, and even by 2020, they had not yet recovered to their historical average of about 1.1 million points. They sat at 990,000.

Then came the Covid-19 pandemic, and during that time, consumer demand increased and mortgage rates hit more than a dozen record lows, so builders responded. Housing starts to soar to 1.1 million in 2021. The Federal Reserve bailed out the economy, making it much cheaper to buy a home, and the new work-from-home culture has Americans commuting like never before. Suddenly, supply was sucked into a whirlwind of demand.

The current odd supply gap between new construction and existing homes is also driven by mortgage rates, which plunged to historic lows at the start of the pandemic and then soared to 20-year highs just two years later. Millions of borrowers refinanced at the lows and now have no desire to move because they would have to trade a 3% or 4% interest rate on their loans for the current rate, which is about 7%. This locking effect caused new listings to dry up.

It also put builders in the driver’s seat. Homebuilders had already ramped up production in the early years of the pandemic, with single-family homes rising to more than 1.1 million in 2021, according to the US Census, before falling again as mortgage rates soared. Builders have been able to buy low mortgage rates to keep sales higher, but as of this May, they are building at an annual rate of 992,000.

Resale listings improved slightly this spring as mortgage rates eased slightly, and through June, active listings were 16.5% higher than a year earlier, according to Redfin. However, part of this increased supply was due to listings staying on the market longer.

“The share of homes on the market for at least a month has been rising annually since March, when new market growth accelerated, but demand from buyers has remained tepid, as it has been since mortgage rates began rising in 2022 ». according to a Redfin report.

In the resale market, bidding is lowest in the $100,000 to $500,000 price range, according to the National Association of Realtors. That’s where the bulk of today’s buyers are. Higher mortgage rates make them look for cheaper homes.

Interestingly, though, while supply is increasing across all price tiers, it’s increasing the most in the same lower price tier, meaning it just isn’t enough. As quickly as homes come on the market, they go under contract.

For example, there is only a 2.7-month supply of homes for sale between $100,000 and $250,000, but the supply is up 19% from a year ago. Meanwhile, there has been a 4.2-month supply of homes priced above $1 million, but supply is up just 5% from a year ago.

This explains why house prices remain stubbornly high, even as supply improves. Prices in May, last measured, were 4.9% higher than in May 2023, according to CoreLogic. Profits have started to shrink slightly, but not across the board.

“The persistently strongest gains in home prices this spring continue in markets where inventory is well below pre-pandemic levels, such as those in the Northeast,” said Selma Hepp, chief economist at CoreLogic.

“Also, markets that are relatively more affordable, such as those in the Midwest, saw healthy price growth this spring.”

Hepp notes that Florida and Texas, which are seeing comparatively more growth in the supply of homes for sale, are now seeing prices below where they were a year ago.

While analysts expected prices to fall and mortgage rates to fall in the second half of this year, it remains to be seen whether rates will actually fall and whether the supply-demand imbalance will allow prices to fall. If mortgage rates do come down, demand will certainly jump, putting even more pressure on supply and keeping prices high.

“Yes, inventory is growing and will continue to grow, particularly as the mortgage rate lock eases in the coming quarters. But current inventory levels continue to support, nationally, new construction and some price growth,” Dietz added. .