Could Home Sales Finally Start To Grow Soon?

It’s the last week of October and available inventory of unsold homes in the US is still on the rise. This was the week last year when inventory finally peaked and started receding before the holidays. Both years of course saw rising mortgage rates hit affordability, so buyers backed off both years. But the new listings volume each week, which is already suppressed this year, grows even thinner once we hit November, so we should expect that inventory is pretty close to its peak for the year now. Still, we have to wonder if this year’s stubbornly high mortgage rates haven’t deterred buyers so much that inventory keeps growing in November a little bit. 

We’ve been talking in these videos for the last few weeks how despite very slow home buyer demand, supply is so limited that home prices have not receded this year and do not appear to be falling now. The rate of sales is very low, and while there are no signs of strength in sales numbers, I have a hypothesis about why we could start to see year-over-year home sales gains before the end of the year. Maybe we’re at the nadir right now.

Let’s look at the US housing market data for the week of October 30th, and I’ll show you what I mean.

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I’m Mike Simonsen, I’m the founder of Altos Research. Let’s look at the data for the week of October 30th. Please refer to the video below for all the charts I mention in this transcript!

Inventory

Available inventory of unsold single family homes rose 1.5% again this week to 562,000. Last year at the end of October was when inventory finally peaked. That moment was also when mortgage rates peaked. It’s not at all clear that mortgage rates have peaked for the year now.  So maybe we have a few more weeks of inventory building as we roll into November. 

There are just 3% fewer homes on the market now than last year at this time. Inventory has been climbing more quickly than last year. In this chart the dark red line is the available inventory of unsold single family homes on the market for 2023. You can see that some time in the next few weeks we could cross back over and end the year with slightly more homes on the market than when 2022 ended. Inventory should decline in November, of course. Very few sellers list their homes for sale over the holidays. And for those homes on the market now with no offers, many are withdrawn from the market. So inventory will decline but just how quickly that happens is uncertain at this point. Most years inventory peaks in August so the fact that it hasn’t peaked yet this year is a real indication of home buyers sitting on the sidelines because of higher mortgage rates and really tough affordability.

Because we have so few sellers, available inventory remains 40% below 2019 levels and less than half of what it would have normally been in the last decade. When will inventory levels get back to the old normal balance in the market? The data shows that it could take several years with higher mortgage rates, resetting the holding costs higher for more people. When it’s more expensive to hold your real estate, you sell it. And slowly we’ll get more available selection for home buyers. It took us a decade of ultra low rates to get this few homes, it could take years to get back to normal levels. 

New Listings & Immediate Sales

But as of right now, even though inventory is growing with these higher mortgage rates, I’ve been working to illustrate that this is not from a flood of sellers. It’s from fewer buyers. It’s important to track both the supply and demand side of the supply/demand equation, because home prices are not falling currently. Demand is low and supply is low too. So we've ended up in a sorta balanced market. 

This chart is a good illustration of both the supply and demand sides in this housing market. This is a view of new listings (new supply) plus those that went into contract immediately after listing, within a couple days. These immediate sales are an excellent proxy for how much demand is out there. The taller the bar the more seller volume there is. The light portion of the bar are the immediate sales. As the light portion shrinks, there's less buyer competition for the best new listings each week. 

You can see a few years ago where there are 100,000 or more single family properties coming to market in a given week.  That gets an annual rate over 5 million, plus another million condos. That’s when we were at a 6 million or more annual rate of home sale. Now there are only 67,000 new single family listings each week. This is not seasonally adjusted, but you can see how the NAR headline number must continue to be under 4 million sales. There are just not enough homes to buy. The market is supply constrained as well as demand constrained.

The dotted horizontal line here shows us how the new listings volume each week is still running below last year at this time. Just a couple percent, but the gap is closing. Last year the market was really slowing. This year the seasonal decline is much more gradual. It could be next week when we finally have more sellers than a year prior. Keep an eye out for that. So when I talk about maybe finally seeing a turn around in the sales volume, the first inkling would be if new supply each week starts to tick up compared to a year ago.

Sales Rate

Let’s change the view from supply and demand to that actual sales rate. These are the pending sales each week. The taller the bar the more home sales are in contract. The light portion of the bar here are the new contracts pending each week. It can be tempting to use the sales rate as a proxy for housing demand. But it’s not that simple. Last year there were more sales, but also more inventory and more new sellers each week. Everything about this market has been constricted all year, the few sales right now is not just a story of weak demand. It’s a story of weak supply and maybe there are signs that supply is at its lowest point.

There are 319,000 single family homes in the contract pending stage now. That’s about 6% fewer in contract than last year at this time. The dotted line shows you how much less purchase activity is happening right now than in recent years. At this time in 2021, there were almost 500,000 single family homes in contract. Remember that? It was a frenzy. But last year slowed dramatically and we’re comparing now to only 339,000 last year at this time. 

There were just 53,000 new contracts this week, compared to 57,000 last year. All year long I’ve been optimistic that the sales rate would eclipse last year finally. But that has not happened yet. So it could be that I’m just continuing my delusions that the market can turn around. In next week’s data we’re moving into November and the offers will decline with the season. And I should point out there is really no sign in the data that sales volume is growing. And why would it? Mortgage rates are at their multi-decade highs. Affordability is stretched. 

But here’s why I’m starting to speculate about this change. Something to watch for with regards to home sales volumes: I’ve talked about how consumers are more sensitive to changes in mortgage rates than they are to the absolute level of the rates. When rates rise, fewer purchase offers get made. And mortgage rates have risen a lot since July. 200 basis points. Consumers feel the change. So here’s the hypothesis: what I’m watching for over the next couple months is what if rates don’t even fall, what if they stay the same into January, for example? I can imagine a scenario where we have a slight uptick in sales volume in the first quarter. Just from rates staying at 8%. Therefore it could be that this quarter is the absolute low in home sales volume. Now, I don’t have the capacity to predict mortgage rates. Rates could go up from here.  The economic data continues to surprise how strong the economy is. The 10 year yield is still rising. If mortgage rates do climb, then I expect inventory will build and sales volume will decline even further. Remember, consumers react to the change in rates. Let’s keep watching the pendings data each week to see if we finally see signs of a turnaround once we get past the holidays.

Also, don’t forget that the headlines are lagging and we’ll definitely see more sub-4 million headline numbers for the next few months. My speculation that we’re at the bottom is very early in the data, so the headlines would take a few months to catch up.

Price Reductions

Lest I get accused of being too sanguine about the prospects in the housing market, I should point out that the percent of homes on the market that have taken price reductions is still on the climb for the end of the season. Right now 38.9% of the homes on the market have taken a price cut from the original list price. Each year price reductions rise in the fall, usually peak in October. Last year the market was under more obvious price pressures than it is now when 43% of the homes had to cut their price vs. 39% now.

In this chart, each line is a year. You can see the bright red line from last year started ultra low and the brakes hit hard. There were a lot of surprised sellers last year. Sellers are much less surprised now. 
I’ve added the gray shaded area on this chart to illustrate the “normal” zone. Normally about a third of homes take a price cut before they sell. As we approach 40% of the active listings with price reductions, see we’re departing from that normal zone. It’s really useful to have this illustration to compare where home prices are now with where sales prices will close in the future.  Homes are on the market now, they don’t get offers, they cut their price in November, they get an offer in December, that’s a sale that closes in January or February. So this is a leading indicator of home sales prices in Q1 2024. 

We can see some price weakness now as rates rose those 200 basis points. But it is not as acute as last year. Last year, remember, led to slightly negative home price appreciation in the spring. Home prices in April of this year were a couple percent lower than they were in April of 2022. The future home sales price signals are not as negative as they were last year at this time. But there’s no growth in home sales prices in the data either.

Home Prices

So let’s look at house prices specifically. Home prices at this time last year were falling very quickly. Sellers were surprised, a lot of price reductions and each week home prices were dropping, faster than you’d expect for the season. They’re easing back now for the end of the year, as is normal for the season but not falling like last year. As a result, the median price of single family homes in the US is now just over 2% more expensive than last year at this time. $435,000 across the US. There are a lot of casual housing market observers who are surprised by this fact. It’s important for people to know exactly what’s happening in the market.

The median price of the newly listed homes each week has been holding up much better than I expected a few months ago, given the dramatically more expensive mortgage payments currently. At $394,000 the newly listed cohort is almost 3% above last year at this time when those prices were falling quickly. Sellers now are much more prepared for the weak demand market than they were last year. I’ve included the vertical line here to show where the market was last year at this time. You can see the bright red line has the two big holiday dips, for Thanksgiving week and then Christmas New Years week before the market resets in January. At this point the leading indicators show that we should still have about 2-3% home price appreciation when we close the year 2023. 

That really sets up next year. If mortgage rates go higher from here, these home price gains are going to evaporate. If rates ease lower, we’ll see more buyers with every notch lower and home prices will stay resilient in 2024. In fact, even if mortgage rates stay around the same level, we could see the activity pick up in Q1. We will see a lot of this predictive power in the pricing data in January. What I can’t predict is mortgage rates. There are a lot of unpredictable macro factors too to keep watching. We all assumed the economy would be in recession now and the data just keeps coming in surprisingly strong. Maybe recession in 2024? And then we’ll have to watch how that plays out in housing supply and demand. Stay tuned for that adventure.

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