If homebuyer demand is so weak, why aren’t home prices falling?
By now everyone knows that homebuyers are holding back in hopes of improving affordability. There were only 55,000 single family homes that went into contract this week. That’s historically low. If I’m a potential buyer, chances are I’m waiting to buy. Maybe I can buy when mortgage rates fall, or maybe I’ll be ready to pounce with cash when home prices fall. Home prices must fall, right?
That’s conventional wisdom. But then the question is: if demand for homes at these prices has fallen, why haven’t home prices fallen to meet demand?
The short answer is that so far, demand is low, but supply is low too. So we find ourselves with a supply / demand balance sufficient to keep a floor on home prices. Let’s look at the US housing market data for the week of October 23rd, 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 23rd. Please refer to the video below for all the charts I mention in this transcript!
Active inventory of homes on the market grew again this week by 1.5% to 554,000. This is now just 3% fewer homes on the market now than last year at this time. Inventory continues to grow now faster than it did last year. Last year October 28 was the peak of inventory for the year because mortgage rates exploded higher. Rates have jumped again this year and we’re on a similar pattern with inventory growth very late in the year. It’s going to be fascinating to see if inventory keeps climbing into November. Part of me thinks it’ll probably top out in the next week because home sellers withdraw any stale listings over the holidays to relist them after the new year.
I’ve highlighted the dark red line here to show you the inventory trend for 2023. It’s just under the bright red line from last year, but since this year’s inventory growth hasn’t yet slowed we could surpass last year's count in November.
Inventory growth is from buyers holding back waiting for affordability to improve. I want to make sure to point out that while unsold inventory is growing, this is not from sellers flooding the market. This dynamic is important to pay attention to because home prices are high, affordability is low, and demand is low. On the surface you might expect that these tough conditions would force home prices down. You might expect home prices to crash or to assume that home prices are falling. But it turns out that a real market correction takes declining demand coupled with rising supply. And we just don’t have the supply half of that equation.
This is an illustration of each week’s new listing volume. These are the unsold each week, the ones adding to inventory. See the dark red line here for all of 2023 has been below all the previous years. This week there were only 57,000 unsold new listings. We have very few sellers. Declining home prices probably require a supply/demand imbalance and what we have is balance. There is a balance between low demand and low supply.
It’s important to remember that there aren’t any factors leading sellers to come to the market. There is no indication anywhere in the data that inventory levels will approach the pre-pandemic years. Inventory levels now across the country are still 40% fewer than even in 2019.
Only really Austin, Texas has more inventory than in recent years. Much of the Midwest and Northeast has available inventory levels that are still at the pandemic lows. Last year at this time we started modeling how 2023 could end up with significantly more inventory. At the time we were expecting recession to bring more sellers to market. That didn’t happen at all this year, so now maybe recession happens in 2024? But, as of right now, there are no indications of any surge of sellers, no investors or distressed homeowners who are rushing to sell their homes. None. We’ll report changes as soon as they happen, but they’re not here yet. We watch this data each week to see if an imbalance between sellers and buyers form. Right now the balance is what is clear.
So that’s the supply side of the equation. Meanwhile we can measure demand trends by looking at the rate of newly pending transactions each week. This week there are only 325,000 single family homes in the contract pending phase. There were 55,000 new pendings this week. Last year saw 343,000 pendings total with 54,000 new. 1,000 more sales this week than last year at this time. That may be surprising, but last year the sales rate was falling precipitously. This year the decline for fall is slower. There are now only 6% fewer home sales pending than a year ago, that’s the closest we’ve been all year. Even though there is no sales growth, by December we could have more sales in the pipeline than in 2022.
You can see the trend in this chart. The height of each bar are the total number of single family homes in the contract pending stage. The light portion of the bar are the new pendings each week. Last year the light portion was shrinking quickly each week. This year is slow, but not slowing like last year. The takeaway here is that homebuyer demand is historically weak, but we don’t measure any precipitous further drop in demand even with mortgage rates over 8%. This is another indicator in the supply / demand balance this market has.
The homes that are on the market are getting fewer offers and sellers have to cut their prices. We can use price reductions to see that the supply / demand balance is slowly tilting in favor of supply. 38.5% of the homes on the market have had a price reduction recently. That’s more than normal for this time of year of course. And it’s still increasing each week. Last year the price pressure was even more negative with 42.5% of the homes having taken a price cut. Last year the supply / demand equation was less balanced. So that means that while there are some bearish indicators for home sales that will close in December and January, it’s actually not that bearish for home prices. If you anticipate that buyer demand will continue to deteriorate, this is the leading indicator to watch. Do price cuts get over 40% in the next few weeks? They very well could.
Looking at home prices specifically, the median price of single family homes is $435,000 now. We can see the balance I’ve been talking about in home prices each week. It’s still shocking for me to see that home prices managed 2023 as an up year. But that’s where we are. Home prices will end 2023 with a couple percent gain over 2022. Last year at this time we were paying attention to the demand side of the equation and it looked like home prices would have to decline in 2023, although it never looked like a huge decline.
As we’re looking at 2024, we can see that how much home prices move will depend a lot on volatile mortgage rates. If rates happen to fall, from 8% to maybe in the 6s, that will spur the demand side of our equation much more than the supply side. So active inventory will fall and prices will likely climb. If mortgage rates stay in the 8s or head higher, that will clamp down on demand, active inventory will climb, price cuts will climb quickly and the year will end with home prices having dipped.
The median price of the new listings hasn’t fallen much this autumn, which is also surprising but it is another indicator of that balance with supply and demand. This week the median price of the newly listed single family homes is $394,900. The bright red line here is moving horizontally now, at the right end of the chart where last year at this time the new listings were reacting to the demand/supply Imbalance and adjusting lower very quickly. By this measure home prices are 2.5% higher than last year at this time.
When we look at the price of homes going into contract, we can see that they are ticking lower. This is partly seasonal, the homes that sell this late in the year tend to do so at a discount, but it’s something for us to keep our eyes on as mortgage rates stay at or over 8%. And we watch to see how precarious this balance is between supply and demand.
The median price of the homes that went into contact this week is $365,000. That's down 1% from last week and 2.5% higher than last year at this time. That’s the dark red line on this chart. This view of the pendings is useful because it’s the closest proxy for sales that will close in November and December. What we know now is that the headlines reporting home sales prices will continue to report year over year gains because those sales that’ll happen in November and December are already in contract now.
It is worth watching the dark red line here too for signals of imbalance. Last year you see the contract prices took big steps down quickly when those imbalances occurred. That can always happen again, even if there’s no current signal that such a price change is imminent. Right now, see the dark red line is bouncing lower for the fall. We’ll watch after the holidays how quickly that changes. In January this year, mortgage rates were dropping from the November peak and that spurred demand, with not enough supply and that pushed the contract prices higher to get us where we are today. What happens if this January we don’t get that fortune? What if rates have pushed higher into January? You’ll see the impact on homebuyer price points right here.
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