Why home prices are still rising even as inventory recovers

Anyone who is shopping for a home today knows that there are still things that can be sold.

The housing market is just starting to emerge from some of the leanest years in history. The inventory of new and existing homes is finally rising, but something strange is happening to those numbers: The supply of newly built homes appears to be very high.

However, these numbers are deceiving due to the unprecedented dynamics of the current housing market, which can be traced back two decades to another unprecedented period in housing, the subprime mortgage boom.

All of this is why house prices, which usually fall when supply is high, continue to rise.

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. A month’s supply is a common calculation used in the market to measure how long it will take to sell all available homes at current sales levels. A six-month supply is considered a balanced market between buyers and sellers.

Supplies have been tight at the start of the decade, but pandemic-driven demand has led to a record low in early 2021 with two months of supply. A 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 again, but the gains are mostly on the new housing market, not on the existing side. In fact, there is currently a nine-month supply of newly built homes for sale, nearly three times that of existing homes. The supply of new and old homes is usually closely tracked. New construction now makes up 30% of total inventory, roughly double the historical share, according to NAHB.

“June 2022 recorded the largest lead for the month’s supply of new homes (9.9) over the month’s supply of single-family homes (2.9),” wrote Robert Dietz, chief economist for NAHB. “This separation makes it clear that current market inventory evaluations cannot simply examine existing or new housing stock.”

This unusual dynamic has been fueled by recent changes in mortgage rates and an unprecedented disaster in the housing market that began 20 years ago.

This housing market is unlike any other because of the economic strength like no other. First, in 2005, there was a huge surge in home sales, housing and home prices fueled by a surge in subprime mortgage lending and a frenzy of trading new financial products backed by these mortgages.

All of them collapsed quickly, causing one of the worst foreclosure crises since the Great Depression and triggering the Great Recession. Single-family homes began to decline from 1.7 million units in 2005 to only 430,000 in 2011. In 2012, new homes accounted for only 6% of the total supply sold and, even in 2020, home starts have not yet recovered. to a historical average of about 1.1 million units. They are sitting at 990,000.

Then came the Covid-19 pandemic and during that time, consumer demand increased and mortgage rates set more than ten records, so builders responded. Housing starts to shoot up to 1.1 million in 2021. The Federal Reserve is saving the economy, making it cheaper to buy a home, and the new work-from-home culture is making Americans move like never before. Suddenly, supply is sucked into a tornado of demand.

Today’s strange divide between newly built and existing homes is also due to roller-coaster mortgage rates, dropping to historic lows at the start of the pandemic and then rising to 20-year highs just two years later. Millions of borrowers were refinanced and now have no desire to move because they have to trade the 3% or 4% rate for the loan to the current rate, which is around 7%. This lock-in effect causes new listings to dry up.

It also put the builder in the driver’s seat. Homebuilders have increased production in the first years of the pandemic, with single-family homes rising by more than 1.1 million in 2021, according to the US census, before falling again as mortgage rates rise. Builders have been able to buy down mortgage rates so that sales are higher, but this May, they build at an annualized rate of 992,000.

Resale listings did slightly better this spring, as mortgage rates fell again, and in June, active listings were 16.5% higher than a year earlier, according to Redfin. Some supply is increasing, but that’s because the list is on the market longer.

“The share of homes sitting on the market for at least a month has increased annually since March, while growth in new listings has accelerated, but demand from buyers remains tepid, as mortgage rates begin to rise in 2022,” according to the Redfin report.

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

But what is interesting is that while the supply is increasing at all price levels, it is increasing at the same low price level, which means that there is not enough. As soon as the house comes on the market, it goes under contract.

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

This explains why house prices remain high, even as supply increases. Prices in May, the latest reading, were about 4.9% higher than in May 2023, according to CoreLogic. Results have begun to shrink a little, but not everywhere.

“The continued strength of home prices this spring has continued in markets where inventory is lower than pre-pandemic levels, such as in the Northeast,” said Selma Hepp, CoreLogic’s chief economist.

“Also, relatively more affordable markets, such as the Midwest, have seen healthy price growth this spring.”

Hepp noted that Florida and Texas, which saw greater growth in the supply of homes for sale, are now seeing prices below a year ago.

While analysts have expected prices to ease and mortgage rates will fall in the second half of this year, it remains to be seen if the true rates will fall and if the supply-demand imbalance will allow prices to cool. If mortgage rates fall, demand inevitably rises, putting pressure on supply and keeping prices rising.

“Yes, inventory is rising and will continue to rise, especially as the mortgage lock-in effect eases in the next quarter. But current inventory levels continue to support, on a national basis, new construction and some price growth,” added Dietz. .