Monday, August 28, 2023 / by Richard Eimers
Mortgage rates are sitting at their highest levels in many years. Higher mortgage rates mean higher monthly payments, less affordability for home buyers, and slightly fewer transactions. And with fewer transactions, inventory is building up just a bit as we approach the end of the summer. When will inventory peak for the year?
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I’m Mike Simonsen, I’m the founder of Altos Research. Let’s look at the data for the third week of July 2023. Please refer to the video below for all the charts I mention in this transcript!
Inventory is still climbing just a bit each week as we approach the end of the season. There are 488,000 single family homes on the market now, that’s an increase of less than one percent from last week. There are 10% fewer homes on the market now than last year at this time.
I expect inventory to climb for another three weeks until the end of the month. Expect another 1% inventory growth this coming week then the pace will level off and start to decline in September.
It’s pretty common for inventory to peak the last week of August. In fact last year inventory had peaked in August, had rounded the top and started declining for the fall when we had that September spike in interest rates. So the number of homes on the market last year jumped in September and October which was very unusual. If rates jump again this fall, I’d expect the same behavior. You can see that unusual increase in inventory in this chart in the light red line from last year. See in August inventory had started curving down, but in September the buyers stopped and inventory surged. Last year inventory peaked during the last week of October. Compare that to this year’s curve and you can see how we’ll end 2023 with probably 20% fewer homes on the market than the year prior.
I’ve said this before and I’ll repeat: it seems to me that consumers are more sensitive to the change in the mortgage rates than in the absolute levels. Mortgage rates are over 7% now and we can see in the data how demand is slow. Last year rates jumped from the low 6s to 7.5% in just a few weeks. It was that jump that stopped any buyers cold - the moment of change where people stopped buying. Those buyers stopped and so inventory grew late in the year. Now rates are at 7% but they’ve been at this level for basically the whole year. So while demand is slow, it isn’t falling. I haven’t seen any indication that mortgage rates will drop from here but if they did, buyers would respond and available inventory of unsold homes on the market will fall too.
It’s no secret that sellers are absent in this market. Each week we’re seeing only 61 or 62,000 single family homes hit the market anywhere in the US. It was this point last year when new listings started plummeting each week. In September even though new sellers were few, buyers were even fewer so inventory rose. I’ve highlighted last September in this chart. See through July new listings volume each week was in the normal range as previous years. Suddenly new listings volume dropped each week. That was the same time when buyers stopped of course. At the time I focused on the buyers - on only the demand side of the equation. I began to get bearish on home prices in 2023. Had I been more wise, more attentive, I could have seen the seeds of this year’s low supply crisis being sown as early as August last year.
You can see how the dark red line on this chart is dramatically fewer new sellers each week than in normal years.
The important takeaway in the new listings data is that there is still no sign, anywhere in the data, of a surge of sellers. There is no sign yet of inventory growing substantially in the near future. There are no AirBnB bust owners unloading in bulk. There are no investors panicking. There are no homeowners distressed and unable to pay their mortgages. A year ago we could start to see this trend, and there were still lots of people who were assuming a bubble burst scenario was playing out. That we’d for sure have tons of supply, weak demand and therefore plummeting home prices. None of those fears played out of course.
But - the economy could still tank from here. It’s important that we don’t assume that this market won’t change. If some of these classes of homeowners start to need to unload, if some of the fears about the housing market start to finally happen, we’ll see it very quickly here in the weekly new listings data. As of right now, there is no sign of any surge in new listings. Like none.
That brings us to the pace of sales. We’re still running below last year’s pace of new contracts each week. 5% fewer sales now than last year at this time. Even while the sales rate was tumbling last year, we still are running fewer sales now. Demand by buyers is low of course, but as we just saw, this is a supply-constrained market. We have so few new listings each week, it’s impossible for the sales rate to climb.
As long as mortgage rates stay at or above 7%, you can easily see how the slow sales rate will continue. Maybe in September or October, if we’re lucky, we’ll see that sales rate start coming in higher than the abysmal rate at the end of last year.
Because we’ve had these surprising green shoots in the housing market all year, I’ve been looking for signs that transaction volume would pick up, maybe that we’d end 2023 stronger than 2022. But man, consumers are very slow to buy at 7% mortgage rates and that shows no signs of changing. There were 66,000 new pending contracts this week with single family homes across the country. That’s 5% fewer than last year and 25-30% fewer sales each week than in 2021. And that sales rate is just showing no signs of growing. There’s no inventory for buyers to buy. One implication though is that you should expect downward revisions in the forthcoming NAR pending sales reports over the next few months. We’ve been at 4.2 million seasonally adjusted sales rate, and I could see that sliding closer to 4 million. I just haven’t seen any indication that will grow. In this chart the height of each bar is the total count of homes in contract in a given week. The light portion of the bar are the new contracts that week. There are 10% fewer homes in contract pending than last year at this time. 5% fewer new contracts this week. Maybe by September we have more home sales so that the fourth quarter 2023 is a little stronger than Q4 last year.
Home prices meanwhile are flat to a little higher than last year at this time, depending on how you measure home prices. The median price of single family homes in the US is $450,000 right now. These are all the homes that are available to purchase. You can see in the dark red line here at the far right end of the chart prices are just off their seasonal peak and just below the all-time high set a year ago in June. Home prices tend to cluster around the big round numbers like $450k, so it’s not uncommon to have several weeks where the median price is unchanged right at $450k or just a fraction below - $449,900 or so. Lots of properties get priced at the threshold so that buyers searching with an upper bound of $450k will see them. There are very few $451k's and a lot of $449ks
We can already see that home prices will have normal seasonal pressure to decline over the rest of the year. Compare that to last year where you can see how steadily prices ratcheted down week after week last year. There’s no indication in the data that home prices will drop like they did late last year.
One of the places we see those leading indicators is in the median price of the newly listed properties each week. The sellers and listing agents in aggregate know exactly where the demand is for their new listings, so we can use those changes to know where future sales prices will be. The newly listed cohort this week was $399,499 so just a hair under $400k. The light red line is off the peak from earlier in the year. Last year it was way off already and dropping quickly each week. That’s not happening now. If you look in the middle of the chart see how the light red line in 2020 and 2021 stayed elevated late in the year. That’s where we could see the demand by buyer kept pushing home prices higher. We don’t have upward price pressure right now of course. But it’s always useful to keep your eyes on the price of the new listings to watch for the next shift in demand.
And when we look at the price of the homes in contract we see that the sales prices are coming in just about 3% higher than last year. The median price of the homes in contract pending stage is unchanged this week at $385,000. That’s 3% higher than last year at this time when prices were plateaued at $375k. You can see how this year’s dark red price line is now consistently above last year’s light red curve. Home prices fell last year in June and July as the market finally swallowed that the pandemic buying frenzy and cheap money were gone forever and home prices fell in the fourth quarter last year with that late summer surge in mortgage rates. If you are communicating with buyers and sellers about price expectations - maybe there are buyers on the fence waiting for home prices to drop, it’s probably wise for them to see that there is no sign of prices dropping. Likewise, if you have sellers who need to not panic about how much they can get for their home, this is really important data for them to see.
This is of course national data, and local markets are behaving very differently from each other right now. If you need to get your local data to your buyers and sellers right now, you should join us at Altos Research. Go to AltosResearch.com and book time with our team to learn how to interpret the market signals for the people who need it most right now. They need you to be the expert for them.
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