In the face of growing supply of unsold homes on the market, we have to ask how much more inventory this market can handle before home prices start to decline. We’re at 19% year over year inventory gains now. That seems like a lot, but it could be maybe 40% growth by this summer, if mortgage rates stay elevated and sellers don’t get cold feet.
So the two questions we’re examining today are: How much does inventory have to climb before home prices fall? And will sellers back off so that inventory is capped like it was last year?
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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 4, 2024. Please refer to the video below for all the charts I mention in this transcript!
Inventory grew by a little bit this week. There are now 498,000 single family homes unsold on the market. That’s an increase of a fraction of a percent from a week ago. As I’ve mentioned, available inventory is climbing across the country as demand slows with higher mortgage rates. So the unsold supply of homes on the market is up 19% from last year at this time. Last year the available supply of homes on the market was still declining in the spring market. So year over year inventory gains aren’t from a flood of sellers, but because demand was stronger last spring. Rates are higher now, demand is less, and inventory is building.
Interestingly inventory is now 107% greater than this point two years ago at the end of the pandemic buying frenzy. The spring of 2022 was when rates started rising. In this chart, the most recent interest rate period is shaded red at the right side. Rates have been generally rising for two full years. Inventory also, therefore, has been rising for two full years. Because available inventory is still a third fewer than pre-pandemic, you can see how it’ll take a few more years with elevated mortgage rates to get the available supply of homes to buy to increase back to the old normal levels.
When I examine how much inventory growth the market will bear before home prices decline, see the big upslope of inventory building in 2022, that led to home price declines. But also the inventory rise of 2018 led to flat home prices a year further out in early 2020, just before the pandemic boom kicked in. So we’re going to watch this inventory line this spring. We’re going to watch whether sellers stay away like last year or whether they lean in and put a lot more supply on the market. It’s going to be a very important March and April. Pivotal for understanding home prices for the entire year. Right now the inventory line is inching up weekly, let’s watch if it shoots higher.
There were only 52,000 new listings this week. That’s a couple percent more than a week ago and only 5.7% more than the same week a year ago. That pace seems to be slowing. Seller growth has been 10 or 15% more recently, now the growth is under 6%. Sellers may be slowing down a bit, but I haven’t yet seen signs that they’re staying totally on the sidelines like last year. But the momentum could indeed be waning. Maybe we’re seeing everyone get frustrated by stubbornly high mortgage rates again.
In this chart each line is a year. The dark red line is this year, the light red line is last year. You can see more sellers each week than a year ago. The gray lines are previous years. The lines are pretty squiggly. There’s a fair amount of noise week to week in these numbers. Lots of things can accelerate or delay sellers in a given week.
One thing to note in this chart is that the sellers last year shut off in March. Normally in March the new listings line would be climbing each week, pretty quickly. But last year, the light red line turned horizontal in March. See where the dark red line is through today and the light red line didn’t climb. So I will be watching this listing volume in the next few weeks. I have been assuming that we were on a growth path for sellers in 2024. But if the next couple weeks come in below expectations, with fewer sellers testing the market, then I’ll have to revise my expectations. We’ll watch here for the next couple weeks.
The other important takeaway from this data is that new listings volume isn’t surging. Because home buyer demand is low with high mortgage rates, total inventory is building. 19% more inventory is kind of a big deal. When you hear that fact, it’s very easy to jump to the conclusion that this market is tanking. As I’ve said, we could be setting up for future home price declines, if inventory continues to build significantly.
But here’s the important point: there still aren’t a lot of sellers. It’s slightly more than last year, but it’s not a lot. See those gray lines on this chart. Many years there would be 60 or 70 or 80,000 new listings in a given week in March. We’re at 52,000. So that half of the supply/demand balance is not really scary. I keep expecting the number of sellers to climb, but if anything this pace has been receding in the last few weeks. So if you have a hypothesis that rising inventory in 2024 will lead to a home price crash, this is going to be an important datapoint to track to see if that plays out.
We should be watching immediate sales too. There were 18% fewer immediate sales this week than the same week a year ago. That seems like a pretty big deal. It’s remarkable how rates over 7% slow home buyers.
Remember immediate sales are what we call those properties that get listed and go into contract within just a couple days. They essentially bypass the active market. They’re not in active inventory, they’re already pending. I like this stat because it gives us a really clear indication of the demand. Home buyers express their urgency when they snap up the best properties right away. Last spring there were surprising levels of demand as illustrated by growing immediate sales. This year is much weaker.
In this chart the height of each bar is the total of all the new listings in a week. The light portion are those that went into contract immediately. There are always immediate sales in any market, the best homes at the right price go quickly. During the pandemic with all the bidding wars, we saw as many as a third of new listings become immediate sales. It’s like 22% this week. 14,000 or so. Last year it was 18,000. And the difference is 80 basis points in mortgage rates. There are fewer deals, so there are fewer people jumping at them right now.
I can’t imagine how the immediate sales metric improves this spring until consumers see mortgage rates ease back down again.
Another indicator of demand we use is price reductions - the percent of homes on the market that have needed to reduce their asking prices. And that metric ticked up again this week. There are now 30.5% of the homes on the market with price cuts. That’s up just a smidge from last week. It’s easy to see exactly how home buyers wait when mortgage rates are stubbornly high.
In this chart each line is a year. It’s not uncommon for price reductions to be starting their seasonal climb in March, but you can see how last year demand was still stronger than supply so fewer sellers each week had price cuts. This year the trajectory is reversed. It looks like in a couple weeks we’ll have more price cuts than a year ago. See at the left end of the chart.
When we examine the question of how much inventory leads to home price declines, this is another place we can see it. See the light red line from 2022. Price cuts were just about to turn the corner and shoot higher. That steep climb was sellers finding suddenly fewer buyers. Home prices declined, on a year over year basis in Q1 of 2023.
So let’s watch price reductions. Do they rise above the normal zone by May? That’d be your signal that inventory growth is hitting home prices.
We can already see that home prices are not accelerating. They’re staying barely above last year at this time. The median price for single family homes in the US is now $429,900. That’s up a fraction from last week and just over 1% more than a year ago. There are really no signs of strength in home prices.
The median price of the newly listed cohort is just under $401,000. That’s a notch down from last week and a couple percent higher than last year at this time.
You should expect home prices to climb for the rest of the spring to peak in June. We can see how sensitive this number is to changes in mortgage rates. There are buyers on the sidelines and if rates were to finally fall again, you’ll see inventory fall with new bidders, you’ll see fewer price reductions and you’ll see the leading indicators of home sales prices, like what we have here, you’ll see those climb over last year. That’s if mortgage rates ease down, but the fact is rates have been climbing. And we can absolutely see the impact on home buyers.
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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