Housing Market

Opinion: Housing supply is the biggest hindrance to the market

How will the market evolve from here?

Across the country, the high mortgage rate environment has impacted supply and demand. Intuitively, everyone recognizes that higher rates and affordability would affect housing demand, ignoring the fact that it also prevents many homeowners from selling due to their underlying low fixed-rate mortgages.

In turn, housing is experiencing a crisis, a catastrophically low level of available homes. During the Great Recession, a glut of homes was on the market. Today, the market suffers from the opposite condition: a minimal supply.

The supply crisis is a United States phenomenon, as only a few homeowners are willing to participate. You cannot purchase what is not for sale, so pending and closed sales activity have been hindered substantially.

Fewer homeowners are coming onto the market, exacerbating the inventory crisis. There are typically a similar number of new sellers every month, year in and year out. During the initial Covid-19 lockdown, there were fewer for-sale signs in the first several months. That turned around as 2020 rolled along. This trend reoccurred last year as rates grew — and it has only intensified since August.

There were 46% fewer sellers in Southern California in the first four months of this year than the three-year average prior to the pandemic (2017 to 2019). In the Bay Area, the number of sellers was down by 33%. This trend will persist as long as mortgage rates remain elevated.

Homeowners continue to hunker down in their homes, unwilling to move due to their current underlying locked-in low fixed-rate mortgage. The difference between their underlying rate and today’s prevailing rate is significant and precludes many homeowners from listing their homes for sale and moving to another house.

The supply and demand model that economists rely on to establish the market’s direction has been broken due to the rapid rise in mortgage rates. Inventory did climb last year, but it remained below four months, indicative of a seller’s market with rising home values. Yet, home values dropped during the second half of 2022 as rates soared and affordability eroded.

After remaining high through October, the inventory dropped substantially for the remainder of the year, and rates began to ease a bit. In 2023, the inventory continuously dropped and did not hit bottom until mid-April. It typically starts rising by the end of January or mid-February at the latest.

It is currently growing at a very slow pace, which is doing very little to address the inventory crisis that is starved for more available homes. Expect inventory to rise slowly until peaking between July and mid-August.

That leaves little time to build an inventory. The lack of available homes is a profoundly entrenched trend that will not improve much anytime soon.

This article is part of our ongoing 2023 Housing Market Forecast series. After this series wraps, join us on May 30 for the next Housing Market Update Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business.  To register, go here.

The very low supply is eclipsing affordability constraints. Negotiations favor sellers, and the market feels a lot like the pandemic years of July 2020 through May 2022. Bidding wars have returned for many markets, the sales-to-list price ratio has surpassed 100%, homes are selling above their asking prices, and values are once again rising. 

Mortgage rates have reached a height and will eventually drop as the economy cools, instigating higher demand.

Mortgage rates eclipsed 7% in October and November of last year, stretching to 7.37% in October, according to Mortgage News Daily — its highest level since 2002. In March of this year, rates eclipsed 7% for a couple of days before dropping to the mid-6s following the collapse of Silicon Valley Bank and other banks.

Since then, mortgage rates have been bouncing between 6.25% and 6.75%. Rates climbed recently toward 7% because of the present impasse over raising the debt ceiling, but will fall back to the prior range as soon as a deal is struck. It will be stuck in that range until the economy slows, unemployment rises, job openings fall, and consumer spending eases.

It takes a while for all of the Federal Reserve’s Federal Funds Rate increases to hit the economy fully. They have hiked the short-term rate from 0% to 5.5% in only 14 months, the swiftest rise since 1981.

Ultimately, obtaining business credit is substantially more costly today, which will eventually impact the economy. Investors prefer long-term investments, such as treasuries and mortgage-backed securities, as the economy cools.

This will result in rates dropping between 5.75% to 6.25%. If the economy slips into a recession, the flight to long-term investments will intensify, and rates will settle between 5.25% to 5.75%. These lower rates will increase demand as buyers’ purchasing power and affordability improves.

It will be interesting to see how the market evolves from here. For now, housing insanity has returned, and it does not look like it will change anytime soon.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author responsible for this story:
Steven Thomas at [email protected]

To contact the editor responsible for this story:
Brena Nath at [email protected]

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