Housing: It’s All About the Inventory!

For now, the housing market is all over the place. Houses that used to be affordable aren't anymore. Read what needs to happen for this market to stabilize.

Housing is all about supply and demand, and while there is a lot of demand for housing, the supply isn't 100% available at this time.

 

Housing affordability is dropping like a rock, as prices move up faster than income and interest rates push up monthly mortgage payments.  It might not seem like home prices can climb any higher or even remain at these lofty prices, given the current headwinds, but that assumes one thing, a continuous supply of willing sellers.  

Like any other market, housing is about supply and demand.  With millions of Millennials wanting to put down roots, unemployment hovering near 50-year lows, and incomes on the rise, plenty of people with healthy paychecks want to buy homes.  But as mortgage rates soar, many potential buyers are finding that homes they could have afforded in February or March are now out of reach.   This redirects some buyers to lower-priced units, while forcing those at the bottom of the ladder to put off a home purchase entirely.  Other buyers simply will pay up, if they can find a home to buy.  

In April, new-home sales dropped 16.6% from a month earlier and 26.9% from the same time last year.  The huge drop resulted in more inventory, calculated by how long it will take to sell the number of new homes for sale.  Inventory increased from a six-month supply to 7.3 months’ worth.  But builders didn’t stand still.  Instead of continuing to push new homes into a shrinking market, in May housing starts dropped 14.4%, to their lowest level since April 2020, when the world was panicked about the pandemic.  Builders are doing their best to keep supply in check as demand ebbs and flows. 

Things are even tighter in the existing-home market, where sales fell to an annual pace of 5.91 million units, down 3.4% in May and 8.6% lower than the same time last year.  The number of homes for sale increased from 1.03 million to 1.16 million, but that still represents just 2.6 months’ worth of supply.  To get inventory up to a six-month supply, a level that reflects a balance between supply and demand, sales would need to fall by more than 50% (down to 2.32 million per year), inventory would have to jump to 2.95 million units, or we’d need to see some combination of the two.  

The lack of supply in both the new-home and existing-home markets explains why the median sale prices continue to climb even as the number of transactions declines. This doesn’t mean home prices won’t fall.  If mortgage rates walk higher, affordability will continue to drop.  If potential sellers see the market getting soft, they could rush to get their property sold before the current high prices disappear.  But with continued high demand and limited inventory, it seems unlikely that we’ll see another free fall like we did in the late 2000s. 

For more information on the housing markets and what sales figures look like, be sure to watch this video by Rodney Johnson

Written by Rodney Johnson                                                                                                                                                                   The Rodney Johnson Report

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