Are We Seeing Shadow Demand for Homes?

In this week's market update, I look at the phenomenon of "shadow demand." One of the persistent bearish arguments over the years has been that we have “shadow inventory” of sellers - people who are ready to sell but who aren’t yet selling. But “shadow demand” may be a more apt description of what we’re seeing right now. These are potential buyers waiting for any new inventory, or for rates to drop or prices to drop. And when they do, these buyers are ready to pounce.

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I’m Mike Simonsen, I’m the founder of Altos Research. Here’s the latest data for the last week of May / first week of June 2023.

Inventory

Inventory grew by 0.7% this week which is just about precisely what the forecasting model expected for the holiday week. The model expects 3% inventory growth each of the next three weeks. The peak of the spring inventory is now. But at the constricted pace we’ve been facing this year, the model has been consistently over estimating.  This tells us that by mid-July we’ll have negative year over year inventory growth. One observation is that shrinking inventory year over year is generally associated with home price increases another year out. So that bodes mildly bullish for home prices in 2024.

You can see the shape of the curves here in this chart.  (Note: watch the video at the top of this post to see all the charts I refer to, or click here to watch on YouTube). The dark red line is the weekly inventory of unsold single family homes this year. Last year inventory was increasing 5-6-7% per week. That’s the light red line. It seems very unlikely that we’ll have any surge of inventory. And when supply is so restricted that is why home prices in the future are supported.
 

Pending Sales

While there are 436,000 homes on the market, there are now 402,000 single family homes in contract. The rate of sales is slowly climbing and closing the gap from last year. There are 13% fewer homes in contract now than last year at this time. At the start of the year we had 35% fewer homes in contract than the year prior.  During the pandemic we had this crazy condition with more homes in contract at any moment than were active on the market. That trend changed last year when demand cooled and inventory increased. That got us closer to a normal level where inventory is much greater. But since demand has increased this year and supply is so restricted, we’re getting closer to having as many pending as for sale. If you’re still in the camp that thinks there is no demand for homes, this is a really notable trend.  That trend took a pause the last two weeks with the holiday and the mortgage jump. I expect the trend to resume in next week’s report.

In this chart the height of the dark bars is the total count of homes in contract pending stage. The light bar is the total inventory. You can see how the pendings volume is approaching the total inventory again.

There were only 64,000 new contracts for single family homes this week. In this chart the dark red line is this year and you can really see the sales rate slowdown for the holiday. This is also a week where mortgage rates are still very close to 7% so purchases have not rebounded yet from last week’s big drop. It’s June so I think it’s very likely that next week’s report will see a rebound in the new contract volume. You can see the jump last year in the light red line - even when in retrospect we know that demand was slowing way down. Each year that volume peaks in June. The details I’ll be looking for here are whether 7% is an actual threshold and if we’re at 6.9% mortgage rates, do people buy?  It’s hard to imagine a big jump in purchases even though rates are down from that spike 10 days ago.  But as I mentioned we can see anecdotally the shadow demand. Homebuyers just waiting for any opportunity. Maybe a 20 basis point drop is part of that opportunity.

The price of the homes in contract ticked down this week. We’re at the seasonal peak so it’s not a surprise.  The median price of the single family pending sales is $384,000. That’s down a fraction from last week and 1.5% below last year at this time. You can see how in July the dark red line from this year will probably be able to catch the light red line from last year. Home prices are down just a touch from last year. They adjusted down very quickly in July and again October last year. If mortgage rates stay at or above 7% we could see prices fall again and finish 2023 with home prices down for the year. 

It seems that the consensus on mortgage rates is that the spreads with the 10 year will compress later in the year and therefore mortgage rates will fall to maybe even as low as 5.5%. I don’t predict mortgage rates. So I don’t know if that’ll happen. But if it does it feels like this shadow demand will jump in quickly and that will definitely keep a floor on home price adjustments, just as it did in the first half of the year. 

Home Prices

Across the country, the median price of single family homes is $450,000 right now. That’s unchanged from last week. The market has a tendency to sit at the big round numbers. These are psychological barriers so we get a large number of properties that price around the same level. $450k is unchanged from last year. If you look at all the homes on the market today, they’re priced exactly where they were a year ago. I expect that red line to stay around this plateau for a few weeks before dipping at the 4th of July holiday. 

With the newly listed cohort this week, we know there are vanishingly few new listings. They were priced at 414,900. That’s down from last week and 3% lower than last year at this time. 

Price Reductions

And the last indicator of demand we’ll cover today is the price reductions. Just over 30% of the homes on the market have taken a price cut. This is a totally normal level. Just 10 basis points more than last week. This time of year price reductions are usually accelerating much more quickly. But this year because inventory is so restricted and demand has remained sufficient all year, few sellers have had to cut their prices. The seasonal changes were late this year. Inventory usually bottoms in January or February and this year it kept falling until mid April. Therefore you can expect that the price reductions are more slow to rise too. Houses have to be on the market for weeks or months with no offers before they choose to do a price reduction. We’ll see price cuts pick up in June and July, but not until we’re surpassed by the levels in 2018, 2019, and 2022.

Basically by third quarter we’ll have fewer price cuts than any year except the two peak pandemic years. That’s what I mean by this shadow demand we can 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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