Inventory of Homes for Sale is Down by 50%
Talk to anyone in the residential real estate world these days and they are likely to tell you two seemingly incongruous things: the market has frozen up and there are still a lot of eager and well-qualified buyers. What’s going on? How are things slowing down so much, yet action around listings for single-family homes is still so solid? The key variable is inventory, which remains at historically low levels that continue to plague a housing market that has been out of balance for quite some time.
How Many Homes Are For Sale?
Before digging into the question of why home inventory is so low, let’s look at some of the data. According to data from the St. Louis Fed/FRED, in May there were 582,032 homes for sale in the United States. Now on the one hand, that is up pretty substantially from the 479,062 homes that were for sale in May 2022, which shows that there has been at least some loosening of the inventory crunch over the past twelve months. However, the current 582,032 figure pales in comparison to the 1.18 million homes for sale in May 2019, the last comparable pre-pandemic month of May to compare against. In fact, the number of homes for sale today is almost exactly half of what it was prior to the pandemic. You can see the overarching trajectory of homes for sale over the past seven years (with fluctuations due to normal seasonality all along the way). The trend is downward:
It makes sense, then, that prices would be rising. It is a basic principal of economics that if supply (in this case, homes for sale) is not sufficient to meet demand, prices will rise. And demand has been robust for the past few years for a variety of reasons including a strong labor market, government stimulus during the pandemic, inward-looking behavior and COVID-related migrations of people working from home, and, of course, maybe the biggest variable, historically low interest rates (up until about one year ago).
Most of these variables are changing, however, if not becoming completely irrelevant. The benefits of the stimulus have petered out and work-from-home migrations are actually reversing; just last week, for example, Meta/Facebook announced that it will require its employees to be in the office at least three days a week, mirroring similar decrees by Google/Alphabet, Amazon, and others. And the big variable, interest rates, has clearly flipped in the past year with the average fixed rate on a 30-year mortgage going from around 3.00% to nearly 7.00%. Yet amid all of these changes, demand for homes has remained strong. No doubt the continually strong labor market is a big part of this. But the key variable is the very low inventory, which may be masking some actual weakness on the demand side. In other words, demand may actually be lower (and I think it is), but because supply is also so low, it is not really showing up yet in the data as prices continue to rise.
According to the National Association of Realtors, nationwide home sales were down 22.4% in the month of April as compared to April 2022 while prices were down 2.1%. Price changes vary geographically, however, with prices dropping the most in the west while prices here in the northeast, for example, were actually up in April 2.8% even as the number of sales dropped by 23.9%. Here in Maine, according to the Maine Association of Realtors, homes sales dropped a staggering 30.53% in April 2023 versus April 2022, but prices rose 6.1%. In April there were just 2,300 homes for sale in Maine statewide, down from 7,100 in April 2019. With enough qualified buyers still remaining and willing to buy, it is going to continue to push prices up until inventory loosens up.
How Will That Happen?
The Fed has been continually hiking interest rates in order to cool the economy and tame inflation, but that has had some unintended consequences including handcuffing people to their homes. No one wants to move upmarket and lose their 3% interest rate (or better) to move into a higher priced home with a 7% interest rate (or worse). We are unlikely to see 3% interest rates again for a long time, decades even. But a meaningful decline in rates from where they are now may be needed to get more people to move, thereby creating new inventory through the natural turnover of homes. If the Fed wants to induce people to move, it may need to actually lower rates. Once that starts happening, the spigots of supply may be turned on and prices could actually drop even as interest rates fall.
The other thing that needs to happen, of course, is significantly more construction of new homes. But as I wrote about recently, single-family home construction is actually slowing down at a time when it is needed the most. In the face of a moderating construction market, cities and towns need to be as pro-housing as possible, including through facilitating new development, helping with infrastructure, and being creative and forward thinking with zoning requirements and things like minimum parking requirements. But the slowdown in construction is also tied to the interest rates; people are just more reluctant (and sometimes simply cannot afford) to finance large projects like the construction of a new home with interest rates being as high as they are today.
The U.S. is still dealing with an extended period of under-building following the 2008 financial crisis, which is another reason today even more than a decade later there are still so few homes for sale; there just are not enough homes, period. Consider the chart below showing new single-family housing starts going back to the 1960s.
The chart shows plenty of fluctuations and meaningful trends spanning multiple years and even decades at a time. However, the sharp drop during the Great Recession is clearly evident, as well as a prolonged recovery, but a shallow one at that. There was not a snapback of new building, in other words, following the 2008-2009 crash. The recovery took over a decade, but the economy not actually return to the status quo of new home construction when there were generally 1.1 to 1.6 million homes under construction at most times for more of the 1990s and 2000s. It took until 2020-2021 for the construction market to get its chin up to the bar of those levels, and already since then new home construction has declined, as evident on the far right of the graph.
I still believe that home prices nationwide will be down 10-15% this year and that prices will generally decline in all parts of the country, including here in the northeast. But the market has remained surprisingly resilient, a function of a generally strong economy with enough well-qualified buyers to keep the real estate market kicking, but also a dearth of supply. Absent a shock to the market that would come through an economic downturn and corresponding job losses or a significant amount of new construction, prices are likely to hang tough due to this low supply to the frustration of buyers and to the benefit of potential sellers over the next 12-24 months.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. © Ben Sprague 2023.
Weekly Round-Up
Here are a few things that caught my eye this week that I think might interest you too:
Reader Holly Dunham shared an article with me reporting that Allstate, State Farm, and AIG are all pulling out of providing homeowners insurance in California thanks to, “Wildfire risks, high home repair costs and reinsurance premiums.” Ten different insurance companies have similarly pulled out of doing business in Florida, while others have significantly raised premiums all along the Gulf Coast. Not only could increasingly high insurance costs lead some homeowners to default on their mortgages due to the higher payments, according to estimates from the article, 13% of Florida homeowners are simply not carrying home insurance at all, which is a huge financial risk itself to themselves personally and to the housing sector more systematically. Read more via Yuliya Panfil on CNN.com.
Via Odeta Kushi on Twitter and First American Calculations, and in line with today’s article topic, the months’ supply of homes is negatively correlated with prices. In other words, the more months of supply on the market, the lower prices go. And when there is less supply of homes, prices rise. This just underscores that home prices are not just a function of demand, but also of supply (or lack thereof).
3. Via Ryan Lundquist on Twitter and in his blog about the Sacramento real estate market, the chart below shows the frequency of the word “Starbucks” in real estate listings over the past twenty-five years. Pretty fascinating bit of data:
4. The owners of the largest hotel in San Francisco are walking away from it, essentially allowing their lender, JP Morgan Chase, which took over the loan when it acquired First Republic, to take over the hotel and prepare it to be sold. Yikes.
5. Via Lily Katz and Sheharyar Bokhari from RedFin, investor purchases of homes fell by 49% in the first quarter of the year, attributable largely to rising interest rates, plus, “Widespread economic uncertainty and recession fears [that] are also prompting investors to pump the brakes. Some investors may be moving their money into other asset classes that offer better returns, such as stocks and bonds,” they say. Read more here.
Have a great week, everybody!