More Sellers, Fewer Buyers

Price reductions ticked up this week for the first time since November in the face of rising mortgage rates. Inventory is rising across the country as home buying affordability takes another hit. The pace of sales inched down too. We can see exactly the impact of higher mortgage rates slowing home buyer demand. As demand slows, inventory grows.

Last year at this time we were actually seeing surprising home buyer demand with rates having fallen to the low 6s. Now mortgage rates are 100 basis higher. As a result inventory is higher and future sales price indicators are also softer than they were a year ago.

We still see more sellers than last year. Each week there are more new listings than a year ago, allowing inventory to build and eventually leading to more home sales this year than last. But that sales growth rate is fragile too.

If mortgage rates stay in the 7s or keep climbing from here, you can see exactly what’s going to happen to home prices. A week ago I mentioned that some of the price signals were softening. Home prices aren’t falling but the growth signals are definitely softening. That trend continues 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 February 26, 2024. Please refer to the video below for all the charts I mention in this transcript!

Inventory

There are now 498,000 single family homes available unsold on the market around the US. That’s 70 basis points more than last week. And 16% more than last year at this time. This the first inventory increase of the year.  The market will continue to build unsold inventory from here for the rest of the season. There’s nothing in the data that shows inventory declining from here this spring. You could get a little bounce up and down, but the trend is quite clear.

Mortgage rates are roughly 100 basis points higher than last year at this time and inventory is 16% more. Rates are 400 basis points higher than two years ago and inventory is 53% higher. Higher rates creates more inventory. 

Many mortgage rate forecasters are still expecting a rate reversal, but until that actually comes to fruition, we will watch higher mortgage rates drive up the available selection of unsold homes. 

In this inventory chart you can see this phenomenon. We’ve shaded red the periods of rising mortgage rates and green for the periods when rates fall.  We’re now two years from the low of mortgage rates and from the low inventory. They both turned the corner at the same time. If we have another year or two with rates in the 7s or higher, we should finally get inventory back to the old normal levels. You can see how inventory is still a third fewer than was available in 2019 but it keeps climbing, inching its way closer every week that rates stay elevated. 

New Pendings

We’ve been sharing how the sales rate has been trying to expand for 2024. Unfortunately, rising mortgage rates have not been cooperating. Last week showed good growth in sales over 2023, and I mentioned that it might be fleeting. And sure enough the number of new contracts started this week dipped. With 59,000 new home sales started this week, that’s 2% fewer than last week. It’s just a fraction fewer than the same week in 2023. 

Any week where we have negative sales growth from last year is a disappointment. But this is where you see the affordability and demand hit from higher mortgage rates. 

In this chart we’re showing all of the homes that get offers and go into the contract pending stage in a given week. These new contracts pending are shown here in the curves from each of the last couple years. The dark line at the left end of the chart is this year trying to expand over 2023s really restricted rate of sales. But affordability has not been cooperating. 

I still suspect that by mid March we’ll see consistent sales growth over last year. The dark line will generally be above the red line of last year’s rate. At the time, a year ago, the market was facing dramatically restricted inventory. Now buyers have more selection so that cap on total transaction volume is lifted. Of course if the economic data on employment keeps coming in strong and mortgage rates rise, then home sales will drop quickly. You’ll see this dark line dip along the red line curve from last year. 

It is important to note that we can have rising inventory and rising sales rates, which is what I expect. I just wish the sales rate were climbing more quickly and reliably. 

Price Reductions

Perhaps the most notable signal this week is that price cuts, the percentage of homes that have reduced the asking price from their original list price, ticked up from last week. There are now 30.4% of the homes on the market that have taken a price cut. That’s up from 30.0% last week.

Every year has a cycle in price reductions. After the holidays the fresh new inventory gets listed, so the percentage that have taken a price cut declines. Then in the spring some of that inventory is still sitting on the market, so those sellers cut their asking prices. Then later in the year price cuts accelerate as the summer comes to a close and peak just before the holidays to start the cycle again.

In years pre-pandemic this end-of-February time is exactly normal to start seeing an uptick in price cuts. Some of the boom years, with all the crazy bidding wars, it took until much later in the spring for price cuts to inch back into the trend.

In this chart each line is a year and you can see the cycle clearly. This year is notable in that price cuts ticked up this week, which is the first time since the pandemic to start to look like old-normal market behavior. 

We are in the normal range with price reductions. That normal zone is the gray band across the chart. Meaning sellers are generally fine, generally getting their prices. There’s no signal of prices falling in this data. The uptick just shows us slowing momentum.

In a couple weeks we could be behind of last year. More sellers with price cuts than a year ago. Last year at this time we were seeing surprising home buyer demand with rates in the low 6s. Now mortgage rates are higher and we see the opposite trend happening. If we see this year’s line curve towards the top of the gray band quickly, that would be the next indicator of home price weakness. 

But we’re not there yet. This isn’t a catastrophic call for home prices. It is simply very clear evidence of how home buyers wait when mortgage rates stay higher for longer. 

Price of New Pendings

The price of the homes that went into contract this week dipped a little too. The median price of the newly pending single family home sales was $375,000 this week. That’s down from $378,000 last week. Almost 1% dip. And is still 2% higher than last year.

It’s normal to have a bit of noise in the newly pending price, a little up and down across the year. It’s not a straight line. But it is maybe unusual to be in this key part of the buying season and see a downtick week. That’s something to keep an eye on. 

This chart of the prices of homes going into contract can be very telling about demand. In the pink line from 2022, you can see sharp down moves in July and again in October 2022. This was the market responding to big mortgage rates jumps at the time.  When the prices on new contracts dipped in the second half of 2022, that led to year over year sales price declines in the first half of 2023. These contracts are the first indication for sales that will close in March and April.

This week’s dip could be just a little noise in the data. But if it proves to be persistent, that would be a very big signal indeed. We’ll keep watching the dark line here. If it drops further you can be sure I’ll highlight it for you. 

Prices dipped this week but are up over 2023 still. I still expect the dark line to turn higher with the season and peak about 3% above the 2022 all time high in Q2. We’ll keep watching this for the next several weeks of course.

Home Prices

The median price of single family homes in the US is $429,000. That’s up almost 1% from last week and is a couple percent higher than 2023 at this time. This chart is of home prices over time and the dark line are all the single family homes on the market across the country at any given moment. 

The median price of the new listings this week is $410,000. That’s a pretty big jump from the week prior. The bright red line here can jump week to week, but you’d expect both lines to be climbing for the spring. 

The dotted lines here help you see how the market is just slightly above last year at this time. You can also see the all time high prices in June of 2022. Home prices are up over last year, but they are not accelerating particularly quickly so it’ll be interesting to see if we pass that peak from two years ago. At Altos we do not seasonally adjust the numbers. This is the price of the homes if you walk into the market today and look around. The median price of single family homes in the US is $429,000. 

I’ve shared a few signals for prices “softening.” I use the word softening, to be distinct from “falling” or “declining.” Home prices are up over last year and do not show any signs of declining in 2024. 

But in February of stronger home price appreciation years, we can see the leading indicators pointing up. At Altos we track the active housing market, all the ask prices and the changes in those prices, so that we can see where sales will happen in the future.  Looking at the far right end of this chart you can see the data for the most recent weeks. The steeper those are climbing each week, the greater the home price appreciation will be for the entire year. And what we can see now is a not very steep climb. You can see an example of the really steep climb two years ago at the tail end of the pandemic boom. Buyers were squeezing in before mortgage rates rose. Those buyers were bidding home prices higher each week. That is not happening now. Even last year the slope of these pricing lines was steeper. Last year ended with 3-7% home price increases depending on which index you use. In February last year, the data was showing those surprising leading indicators. Now the data is notably softer. We’ll obviously be the first to point it out if those pricing signals turn negative. Which they could if mortgage rates jump into the upper 7s or 8% again. Something to keep a watch for.


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