In 2023, the housing market is marked by persistent supply constraints, which are driving home prices up and sparking fierce competition among buyers.
This isn't the same housing market we saw in 2021. Back then, buyers were actively seeking homes, thanks to record-low mortgage rates and increased savings from reduced spending during the pandemic's peak. Fast forward to today, where mortgage rates have risen to around 7%, compared to the tempting 3% of the past. The landscape is now defined by homeowners who locked in low rates two years ago and have little motivation to sell, particularly given the current economic uncertainties.
Lawrence Yun, the chief economist at the National Association of Realtors, highlights that the available inventory for sale today is essentially half of what it was in 2019. Total housing inventory as of June amounted to 1.08 million units, equivalent to just 3.1 months of supply at the current sales pace. Typically, a balanced market boasts five to six months of supply.
A recent analysis by Redfin Corp. reveals that in the first six months of 2023, only around 14 out of every 1,000 homes across the nation changed hands. This marks the lowest turnover rate in at least a decade. Compared to 2019, prospective homebuyers now have 28% fewer homes to choose from than they did before the pandemic.
Last year, as mortgage rates increased due to the Federal Reserve's interest rate hikes, buyer demand quickly waned, monthly home-price appreciation stabilized, and inventory finally started to grow. All these signs would typically suggest a shift to a buyer's market. However, today's market is far from that. Home sales fell by 18.9% year-over-year in June, according to NAR data. Surprisingly, about one-third of homes currently sold are fetching prices higher than their listing values.
Lawrence Yun explains this intriguing phenomenon: “Any buyer would say it’s difficult to purchase because there are other buyers competing for the same property. We have an interesting dynamic where sales are lower, yet it is a very difficult time to realize their completion on their home sale.”
While the new-construction segment of the market is helping somewhat with the inventory challenge, many builders had to recalibrate their plans last year due to weaker buyer demand. As a result, they are still catching up in terms of lot acquisitions and development activity in the first half of this year.
Privately-owned housing starts in June were 8% below the May 2023 rate and 8.1% less than June 2022, according to the U.S. Census Bureau. Residential building permits in June were also 3.7% below the May 2023 rate and 15.3% less than the June 2022 rate.
However, new residential construction takes time and is constrained by factors such as the availability of construction workers. Furthermore, many new homes today are not priced for first-time buyers, which complicates the supply-demand balance.
So, what can make a significant difference in the existing home inventory situation?
1. Mortgage Rate Movements: Mortgage rates play a pivotal role in the housing market. Over the past year, they have been closely monitored as the Federal Reserve's efforts to control inflation pushed rates upward. In the first half of 2023, mortgage rates have generally ranged between 6% and 7%, providing some predictability for buyers. However, these rates are less appealing to homeowners who previously secured sub-3% mortgage rates.
2. Life Circumstances: Traditionally, major life events like a new job, marriage, birth, divorce, or death prompt individuals to move within the housing market. However, today's market conditions are causing many buyers to stay put, even in the face of significant life changes. This exacerbates the issue of tight inventory, as people are reluctant to part with their homes, primarily due to the favorable interest rates they enjoy.
3. Attitudes Toward Home Prices: People's perceptions and expectations regarding home prices may also be impacting their willingness to list their homes. As the market cooled last year, some homeowners may have viewed it as an unfavorable time to sell, particularly if they had purchased their homes at the peak of the market's price surge.
Housing economists largely agree that mortgage-rate movements hold the key to unlocking not only increased buyer demand but also the potential for new supply. If rates drop persistently, it could motivate existing homeowners to list their properties, especially those waiting for the right moment to upgrade or relocate.
While a substantial drop in mortgage rates is not predicted in the near term, it remains a possibility as inflation stabilizes. However, a return to a 3% mortgage-rate environment seems unlikely. Moreover, any substantial decrease in mortgage rates is more likely to stimulate buyer demand than motivate sellers to list their homes.
Nonetheless, even a slight narrowing of the gap between current homeowners' sub-3% rates and the prevailing 7.19% average rate (as of July 24) could make the cost of moving more palatable for existing homeowners. This small shift could help alleviate some of the challenges presented by today's tight housing market.
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