Inventory Builds, Putting Pressure on Home Prices

Available inventory of single family homes for sale rose another 1.3% this week. Even though that’s a slight deceleration from the last few weeks when inventory was climbing by nearly 2% per week, this is all happening late in the year, and it doesn’t appear to have topped out yet. The total number of unsold homes on the market will keep climbing probably for the rest of October on the same schedule as last year. This is an obvious indication of slower buyer demand in the face of dramatically higher interest rates. 

We got some encouraging inflation news on Thursday, though: inflation is cooling at a pace where maybe the Fed can finally stop raising interest rates. So perhaps mortgage rate pressures will be lighter in the coming weeks. It’s common now to hear 8% mortgage rates being quoted to potential homebuyers. For many potential people in the market, it’s really easy for them to take a wait and see attitude. Fewer offers are being made so inventory builds. 

As always it is important to note that none of the inventory increase is from a surge of sellers. That means that even as home buyer demand slows way down again, sellers are holding back too, so home prices are facing only light downward pressure.

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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 2nd. Please refer to the video below for all the charts I mention in this transcript!

Inventory

There are now 535,000 single family homes on the market. That’s an increase of 1.3% from last week. As mortgage rates have continued to climb, most potential homebuyers have really had no choice but to sit on the sidelines. In this chart you can see the dark red line is climbing each week. There are 5% fewer homes on the market now than last year, but inventory is climbing faster now than it was then. In a few weeks we could have more homes on the market than last year. 

Inventory continues to build faster than last year at this time, which is not surprising given the multi-decade high cost of money, but it is surprising compared to the first half of this year. For six months the theme was because there were very few sellers, the market actually had more buyers than sellers. But the second half of the year and especially in the last 6 weeks that story has changed. In most of the country, inventory is building each week despite being late in the season. Normally at this time of year, the market has crested and inventory is falling. But not last year, and not this year. In September of both years mortgage markets spiked the cost of loans. 

As I mentioned there’s not a surge of sellers. I point this out because if you’re expecting a crash in home prices you really need both sellers surging and buyers fleeing. This week there were only 68,000 single family homes newly listed. 11,000 of those went into contract immediately. But that’s 25% fewer sellers than for example in 2021. 

Sales Rate

When we look at the sales happening now, there are only 340,000 single family homes in contract pending stage with 56,000 new contracts this week. That’s 11% fewer than last year at this time.

Here we’re looking at the total count of single family homes in contract at any given time. At the far right end of the chart see the steady decline in the number of home sales happening. The light portion of each bar is the count of new sales that week.

Last year at this time, in the middle of the chart was when the brakes really were slammed on. The total sales pending each week was dropping dramatically from the pandemic peaks, to this crazy new post-pandemic era. There are 30% fewer homes in contract now than during the pandemic peaks. That’s like 6 million home sales in a year to a 4 million pace. And there is no sign in the data yet of that pace recovering. Maybe next year before there’s opportunity for that sales pace to grow again. 

What’s notable is that this was the moment last year when the sales started grinding to a halt. And because it was such a dramatic slowdown then, the weekly new pendings is only 4% fewer now than then - 58,000 last year at September end in 2022 and 56,000 this year.  In this view I’m just showing that sales pace each week. The dark red line is this year vs. the light red line last year.  Notice how earlier in the year the sales pace almost got ahead of last year. We could feel that demand at the time. But then rates surged over 7% and the sales pace slowed again. The dark red line showing this year's sales pace fell below last year’s light red line. 

It’s the end of the season so the sales pace will keep slowing into January. That’s why it’s next year before we’re likely to have any opportunity for the sales pace to pick up off this ultra low 4 million annual pace. In fact the headlines could go under 4 million soon. 

The pace of sales is not always a measure of demand. Much of this year we had a supply-constrained market. We had more buyers than sellers. If we'd had more sellers we’d have had more sales. But that’s no longer true this fall. This sales slowdown is a demand slowdown. 

Price Reductions

And that of course is why price reductions are accelerating still. It’s not uncommon to see more price reductions this time of year as homes still on the market start taking discounts to move before the holidays. But this year, the pace of those discounts is accelerating. That’s a real strong signal that buyers are staying on the sidelines. As of this week 37.5% of the homes on the market have taken a price cut from their original list price. When a house lists for sale and there are no offers, and it sits for a few weeks, then it’s time to cut your price. Normally about a third of sellers go through that process. Of course when was the last time we had a “normal” market? But normally 30 or 35% of the homes on the market take a price cut before they sell and now 37.5% have had to cut prices. That means more sellers were surprised by weak demand. It’s a very clear signal and growing bearish for future sales prices. These are homes on the market now, they take price cuts in September and October, finally when they get an offer it’s at a discount, the sales close in November or December. So this stat here is bearish for future sales prices at the end of the year.

In this chart the dark red line is the curve of price reductions for single family homes on the market this year.  Early this year that curve was sloping down as buyers surprised us. For the first half of the year there were more buyers than sellers. But as I said, that changed when mortgage rates jumped over 7 and 7.5%. So there are more price cuts now than normal. Last year at this time over 40% had taken a price cut. Last year is the light red line here. So there are now more price reductions than any recent time except last year. 

Home Prices

Home prices are staying at or just above where they were last year at this time.  The median price of all the single family homes in America is now $440,000. That’s unchanged from last week and 1% higher than last year. 

When we look at the leading indicator of the price of the new listings each week we can see that number keeps coming in at or just above last year at this time too. $395,000 for the new listings this week is 1.4% higher than the cohort from last year. 

I said earlier that it looks bearish for home prices for sales in the future based on the weak demand right now, but last year at this moment, it was actually more bearish. There are 37.5% of the homes taking price cuts now, it was 41% last year. So what this is telling us is that even though there is downward pressure on prices now, we’ll still end the year up over 2022.  8% mortgage rates are a new variable to homebuyers and if rates stay higher for longer, that’ll impact the 2024 outlook for home price appreciation. As of right now the data is pretty clear. Inventory is growing to about the same level as the end of last year. Prices will end 2023 a little higher than 2022. Then we start looking to January for the next big trend changes.

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