Why home prices are still rising even as inventory recovers

Anyone shopping for a home today knows there are still precious few for sale.

The housing market is just starting to emerge from its weakest years on record. The inventory of new and existing homes is finally picking up, but there’s something suddenly odd about the numbers: The supply of newly built homes appears to be very high.

The numbers, however, are misleading because of the unprecedented dynamics of today’s housing market, which can be traced back two decades to another unprecedented time in housing, the subprime mortgage boom.

All of this is exactly why house prices, which usually settle down when supply is high, just keep going up.

There is currently a 4.4 month supply of new and existing homes for sale, according to the National Association of Home Builders, or NAHB. Monthly 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 bid is considered a balanced market between a buyer and a seller.

Supply was already low earlier this decade, but pandemic-fueled demand pushed it to a record low by early 2021 with only a two-month supply. This lack of homes for sale, combined with strong demand, pushed home prices up more than 40% from pre-pandemic levels.

Now the supply is finally starting to increase, but the benefits are mainly on the new domestic market, not on the existing side. In fact, there is now a nine-month supply of new homes for sale, nearly three times as much as existing homes. The months supply of new and old homes usually follows very closely. New construction now accounts for 30% of total inventory, about double its historical share, according to NAHB.

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

This unusual dynamic has been fueled 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 due to various economic forces. First, in 2005, there was a massive increase in home sales, home construction, and home prices fueled by an increase in subprime mortgage lending and a marketing frenzy of new financial products backed by these mortgages.

All of this quickly collapsed, resulting in one of the worst foreclosure crises since the Great Depression and triggering the Great Recession that followed. Single-family housing started to fall from 1.7 million units in 2005 to just 430,000 in 2011. By 2012, new homes accounted for just 6% of the total supply for sale and, even in 2020, housing starts had not recovered still at their historical average of about 1.1 million units. They were down to 990,000.

Then came the Covid-19 pandemic, and during that time, consumer demand soared and mortgage rates hit more than a dozen record lows, so builders responded. Housing starts to hit 1.1 million in 2021. The Federal Reserve was bailing out the economy, making home buying much cheaper, and the new work-from-home culture had Americans moving like never before. Suddenly, supply was absorbed into a tornado of demand.

The current odd divide in supply between newly built and existing homes is also due to mortgage rates, falling to historic lows at the start of the pandemic and then climbing to 20-year highs just two years later. Later. Millions of borrowers refinanced at rock bottom levels and now have no desire to move because they would have to trade a 3% or 4% rate on their loans for the current rate, which is around 7%. This blocking 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 U.S. Census, before falling again as mortgage rates rose. Builders have been able to buy 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 fell slightly, and through June, active listings were 16.5% higher than they were a year ago, according to Redfin. Part of this increased supply, however, was due to listings staying on the market longer.

“The percentage of homes sitting on the market for at least a month has increased year-over-year since March, when growth in new listings accelerated, but demand from buyers remained tepid, as it has been since mortgage rates began to rise. were growing 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. This is where most of today’s buyers are. Higher mortgage rates make them look for cheaper homes.

Interestingly, however, while supply is increasing at all price levels, it is increasing the most at the same lower-end price level, meaning that it simply isn’t enough. As soon as the houses are coming on the market, they are going under contract.

For example, there is only a 2.7-month supply of homes for sale between $100,000 and $250,000, but supply is up 19% from a year ago. Meanwhile, there is a 4.2-month supply of homes priced over $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, the latest reading, were 4.9% higher than in May 2023, according to CoreLogic. Profits are starting to shrink a bit, but not everywhere.

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

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

Hepp notes that Florida and Texas, which are seeing relatively greater growth in the supply of homes for sale, are now seeing lower prices than they were a year ago.

While analysts have expected prices to ease and mortgage rates to decline in the second half of this year, it remains to be seen whether real rates will decline and whether the supply-demand imbalance will allow prices to cool. If mortgage rates fall, demand will likely increase, putting even more pressure on supply and keeping prices high.

“Yes, inventory is growing and will continue to grow, especially as the effect of the mortgage-rate lock-in diminishes in the coming quarters. But current inventory levels continue to support, on a national basis, new construction and some price growth, Dietz added. .