How This Week’s Fed Meeting Could Impact the Housing Market

There’s a big Federal reserve meeting this week, and we’ll learn more about the future of interest rates then. I don’t have any capacity to predict interest rates - I’m not convinced anyone does. But what we do know is what happens to the housing market if rates rise from here, and what happens if they fall. That's the focus of our market update this week.

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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 March 18, 2024. Please refer to the video below for all the charts I mention in this transcript!

Inventory

Available inventory of unsold homes on the market rose by a healthy 6600 homes this week or 1.3%. There are now 22% more homes on the market than a year ago. There are 105% more homes on the market now than two years ago. 250,000 more homes are on the market now than when we exited the pandemic boom in March 2022. 

At this moment in 2022 interest rates and inventory had started rising quickly together as the pandemic boom ended. Mortgage rates were still in the 3s in early March 2022. By April they were in the 4s and by May they were in the 5s. In fact this week two years ago was when we saw the last of 3% mortgages.  Then as mortgage rates rise so does available inventory of unsold homes. Demand slows, inventory grows. We can see that illustrated here. That’s the rightmost red shaded area on this chart. That’s the last two years of rising rates and inventory rising in lockstep. This chart shows the last decade of inventory trends. You can see the big green section in the middle is the pandemic boom when rates fell so quickly, so did inventory. 

Now. As the economy remains surprisingly strong, mortgage rates are staying higher for longer than people predicted. As long as rates stay high, inventory will keep growing. I’ll say this every week, higher rates mean slower demand. As demand slows, inventory grows. 

There are now 507,000 single family homes unsold on the market around the US. That’s up 1.3% from a week ago and 22% more than a year ago. 

While inventory is growing across the country, some markets are way more impacted and already have more homes on the market than in 2019 or 2020 just before the pandemic. While some markets are just now growing off those pandemic lows. But nearly all markets are showing inventory growth over last year now and this is expanding every week. 

The takeaway from the inventory chart is that if mortgage rates continue to rise say to 7.5% or back to 8%, we will see a pretty dramatic increase in unsold inventory.  But if rates finally fall, let’s say to 6.5 or lower, we’ll see consumers act very quickly and this inventory growth will reverse. Lower rates mean more buyer competition and less unsold inventory. 

New Listings

This week 59,000 new single family listings unsold came to market. New listings volume continues to run ahead of last year. More sellers than last year. In fact this week after including the 16,000 immediate sales there were 24% more new listings than the same week a year ago. Last year was probably a record low for mid-March. Last year very few sellers. Now all year long for 2024 we should expect to have more sellers than a year ago, which is a very good thing. 

In this chart each line is a year. The dark red line is this year. The light red line is last year. It’s easy to see how we have more sellers each week now than a year prior. Last year that light red line was ultra low all year. As the market adjusts to the new normal interest rate levels, slowly more sellers are entering the market. 

Note the gray lines on this chart. Those are previous years. It was not that long ago that we had 70 or 80 thousand new listings each week in March. We’re at 59,000 right now. So the seller volume is climbing but it’s not a lot. I view this as healthy growth. I’d like to see even more, to be honest. Because more sellers means more selection for buyers and more sales that can happen. 

The takeaway from the new listings data is that we have reliably more sellers than a year ago. This is a good thing. We also still don’t have a lot of sellers. Still a third fewer than in recent years. So nationally there isn’t any sign of supply and demand getting out of balance. Maybe there are some local markets that get out of balance, but nationally, no sign of that. 

Price Reductions

As mortgage rates continue to stay in the 7s, demand is slow. We have gradually increasing supply, and generally soft demand. And as a result some of the leading indicators for future home sales prices are starting to weaken. Demand is low, supply is creeping up. 

One obvious place to watch this pricing transition is in the percent of homes on the market with price reductions. This week 30.9% of the homes on the market have taken a price cut. That’s up half a percent this week and is now more than a year ago. 

At the left end of this chart see this year’s curve is starting to climb up and is ahead of a year ago, a year ago price cuts were still receding in a surprisingly strong spring. 

It’s totally normal to have around a third of homes on the market to take a price reduction from the original list price. We’re going to watch the slope of this curve. Mortgage rates jumped back over 7% this week on strong economic news. This week is when the Federal Reserve meets and discusses future interest rates cuts. If the Fed comes sounds more conservative than it has recently, that could drive mortgage rates even higher. We can use this price reductions chart to view exactly how quickly the market reacts to higher mortgage rates. Over the next couple weeks I’m watching to see if the price reductions accelerate. 

More price reductions happen because homes are on the market now, if rates jump, a few prospective buyers don’t make offers. So a few more sellers cut their prices. This is a pivotal time for measuring buyer demand. 

Price cuts are up just a touch and buyers are not afraid to hold back. We can see how fragile this market is already.

Home Prices

A longer-term signal is watching the asking prices of all the homes on the market. If you walk into the US real estate market right now and look around this is what you see. 

The median price of single family homes in the US right now is $435,000. That’s up a notch from last week and just 1.2% higher than a year ago. Again, in January I expected this price data to be accelerating a little more quickly than it has. That’s the dark line on this chart. Home prices peak each year in June with the peak seasonal demand weeks before receding a bit in the second half of the year. At Altos we don’t seasonally adjust the numbers, we’re counting every home. So this is a direct representation of the US real estate market. You can see how last year’s June peak didn’t surpass the all time high established two years ago. The question now is will we surpass that all time high this year or will it get delayed until 2025?

The median price of the new listings inched down just fractionally this week to $419,900. The new listings cohort is priced 5% higher than a year ago. That’s the bright red line here. The new listings are an excellent leading indicator for future home sales prices. The sellers and listing agents use all their collective wisdom and in aggregate they know exactly where to price the new listing. What this data tells us right now is that across the US we have just narrowly increasing home prices this year so far. The signals are slightly weaker now than the data at the start of the year led me to expect. 

Pending Prices

This week saw 66,000 new contracts for single family homes started. That’s 15% more than the same week a year ago. Since mortgage rates have been on the rise this year, the sales have been just barely above last year, so this week was probably a bit of an anomaly but it is welcome nonetheless. Any sales growth is good to see. 

When we look at the price of the homes in contract but not yet sold - these are the pendings - We see that home sales prices are coming in about 4% higher than a year ago. The median price of all the homes in contract right now is $389,000.  Home prices ended 2023 at 5-6% gains over the previous year, so home price appreciation is compressing as mortgage rates have risen. 

This chart shows us the last three years of pricing in the pending home sales. I like this measure for home prices because it is the earliest proxy for sales that will close in April. 

It shows us that prices adjusted lower in July of 2022 and again in October that year. Last year was mostly catch up. Because prices fell at the end of 2022, they showed year over year declines in the second quarter of last year. I’ve highlighted that time gray. See how last year’s red line was lower than the year prior and didn’t resume growth until later in the year. Now we’re ahead of the year prior, by 4%,  but if mortgage rates jump from here, we can see the leading indicators show us that these gains are fragile. 

If rates stay steady around 7%, I don’t expect much price correction lower. If mortgage rates jump from here, I expect that we’ll see a step down in home prices like we saw in October of 2022. That’s the light red line here, towards the right end of the chart. That was a moment of unexpected spike in rates and consumers stopped immediately. Keep your eyes on the pending sales prices. 

These are pivotal weeks for the housing market. There are home buyers and sellers sitting on the sidelines waiting for conditions to improve. And meanwhile mortgage rates are actually rising, so conditions may not be improving. If potential sellers knew the data, would they act differently?

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See you next week!