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Housing: It’s All About the Inventory! Thumbnail

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

Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. The information presented is not to be considered advice you can or should act upon for investment, tax or estate planning purposes without consulting with a professional to discuss your own set of unique circumstances. This article is designed to provide you with information regarding investing and planning for or during retirement.  You must seek professional advice separately before acting on any items discussed in this article. The views expressed are those of Rodney Johnson and not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Rodney Johnson is not affiliated with Mutual Advisors, LLC or California Retirement Advisors.