Housing MarketReal Estate

Inventory is 19% higher than a year ago: Altos

The biggest risk for housing this year is too much inventory growth, fewer buyers and more sellers.

At HousingWire, we have a debate about whether home sellers will freeze up again this year as mortgage rates stay stubbornly high. We’ve had seller growth for 18 weeks in a row. I’ve previously been confident that trend will continue.

A couple months ago, when rates were in the 6s still, I suggested that we could see 15% home sales growth this year. More sellers means more sales. But now it’s March, and mortgage rates are the highest they’ve been all year, the economy continues to report strong numbers so the Fed is growing less likely to cut rates soon. 

And as a result, as inventory builds, the sales growth trend shows signs of slowing. Will sellers retreat entirely, like they did last year? We know that these higher mortgage rates are deterring buyers, and inventory is building. But will rates deter sellers also? Will higher rates keep a cap on inventory like it did a year ago?

I still feel like the biggest risk for housing this year is too much inventory growth, with fewer buyers and more sellers. I always emphasize the Altos Rule which says that higher rates lead to greater inventory. Mortgage rates are up over last month, and over last year. Inventory is up in lock step. So that rule holds. In the face of growing supply of unsold homes on the market, we have to ask how much inventory will this market handle before home prices start to decline? We’re at 19% year over year inventory gains now. That seems like a lot, but it could be maybe 40% growth in the number of homes on the market by this summer — if mortgage rates stay elevated and sellers don’t get cold feet.

Year-over-year inventory change is one of the most clear signals for home price changes a year further out. Mortgage rates could keep climbing. Up until recently, the bond market has expected the Fed to cut interest rates early in 2024. Because the economy is so strong and resilient, those rates cut expectations are being pushed further into the future. 

So the two questions we’re examining today are: How much does inventory have to climb before home prices fall? And will sellers back off so that inventory is capped like it was last year?

At Altos Research we track every home for sale in the country every week. This market changes too quickly to wait a month for the latest data. We track all the pricing, all the supply and demand, all the sales, and all the changes in that data so you can understand immediately as it happens.

For more on inventory trends, pricing, price reductions and home sales, check out the above video.

You should expect home prices to climb for the rest of the spring to peak in June. We can see how sensitive this number is changes in mortgage rates. There are buyers on the sidelines and if rates were to finally fall again, you’ll see inventory fall with new bidders, you’ll see fewer price reductions and you’ll see the leading indicators of home sales prices, like what we have here, you’ll see those climb over last year. That’s if mortgage rates ease down, but the fact is rates have been climbing. And we can absolutely see the impact on home buyers.

These are pivotal weeks for the housing market. There are home buyers and sellers sitting on the sidelines waiting for conditions to improve. And meanwhile mortgage rates are actually rising, so conditions may not be improving. If potential sellers knew the data, would they act differently?

Mike Simonsen is the president and founder of Altos Research.

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