High mortgage rates are fueling strong inventory growth

Housing inventory

There are now 526,000 single-family homes active unsold on the market. That’s up 2.6% from the previous week when the data included the Easter holiday. It’s a holiday week jump so it’s not super crazy, but a 2.6% jump in unsold inventory in a week is very notable. This is absolutely a function of high and rising mortgage rates. I’ve been sharing this view for two full years now. As mortgage rates rise, inventory rises. Or, to put it another way: demand slows, inventory grows. So, rates are up and inventory is undeniably growing. 

Available inventory of unsold homes on the market is 30% greater than last year at this time and 102% more than in mid-April 2022. There are 120,000 more homes on the market now than there were last year. There are 250,000 more homes on the market now than two years ago. Much of this inventory increase is concentrated is a few key markets.

Two years ago, rates were obviously rising for the first time in years and inventory was rising too. Inventory was coming off the record lows of the pandemic, but was already increasing 2-3% per week as demand slowed.

Year-over-year inventory growth like this can lead to home-price declines in the future since sales price measures lag way behind the changes in supply and demand. Because we have 30% year-over-year inventory gains now, we’ll be on the lookout for more signals of weakness in home prices as the year progresses.

It’s important to note that we don’t see any signs in the data of a major home-price crash. In early 2022, inventory rose quickly and home prices fell in Q4 of that year. Home prices recovered in 2023 very quickly though. If we finally get some stability in mortgage rates, expect stability also in home prices. If we are in a world of continued rising mortgage rates, supply and demand will continue their imbalance and we’ll likely see price adjustments.

New listings

Inventory growth is from a combination of fewer buyers as affordability worsens, but also gradually improving seller volume. There were 66,000 new listings unsold last week plus another 20,000 immediate sales for 86,000 total new listings. That’s 32% more new listings last week than the same week a year ago.

The measure from last year included last year’s Easter holiday weekend so some of this 32% is from that easy comparison. But each week in 2024 is averaging 13% more sellers than last year at this time. So we have obvious seller growth as we settle into mortgage rates higher for longer.

This concept is counter-intuitive. Many listeners are familiar with the concept of a mortgage rate lock-in. This was the topic of my Top of Mind podcast interview last week with Jonah Coste from FHFA discussing their paper on the lock-in effect.

The lock-in premise is that if rates rise, it becomes more expensive for homeowners to move, so higher rates create more lock-in and fewer sellers. But that’s proving to be only partially true. The lock-in effect keeps us with relatively few sellers: 80,000 instead of 100,000 each week in previous healthy years, but we have more sellers every week than last year even though mortgage rates are higher now. 

In fact, there were more new listings last week at 66,000 than any week in 2023 and we have a couple months of spring still for that number to climb.

New pendings

Meanwhile, there were 69,000 new pendings last week. These are homes that were listed, took offers and started the contract process. It takes just under 40 days on average to close the transaction, so these are sales that will close in May for the most part. 

The 69,000 contracts is 10% more than a year ago and 7% more than the previous week, which included the Easter holiday. So like the inventory numbers, last week’s big jump is mostly a rebound from the holiday. But it’s really encouraging that sales each week continue to come in ahead of last year.

If rates finally fall, we’ll see this transaction rate accelerate, and we’ll see inventory fall too. But there doesn’t seem to be any inclination of rates falling. This weekly new pendings data is a very handy measure of interest-rate sensitivity.

There are 371,000 single-family homes in contract right now. That’s just 4% more than last year at this time. A lot of places in the country still have fewer sales than last year. The market is trying to grow, but a new jump in mortgage rates doesn’t help. More sales are happening with cash right now, so the mortgage indices are still at record lows. If we get lucky and rates don’t keep climbing, then we’ll continue to see home sales run just a little ahead of last year. The more stable rates stay, the more sales can inch forward.

Home prices

The median price of the homes that took offers last week was $389,900. That is actually below 2022 by 1%. In 2022, home prices still had pandemic momentum into the second quarter. The median price of all the homes in contract is $399,000, which means the homes that sell in April and May will be 5% higher priced than 2023. 

The median price of the active market was $447,527 last week. That’s up for the week and 1.7% above last year. The asking prices are leading indicators of where future sales prices will happen. And the growth in those leading indicators is not very strong — just barely above last year at this time. 

The price of the newly listed cohort came in pretty strong in the week after Easter at $435,000, which was a new all-time high for that measure. So, not all of the pricing indicators are bearish. That’s good to keep our eyes on.

Price reductions

On the other hand, 32.1% of the homes on the market have taken a price cut. That’s up a fraction from the previous week, 10 basis points. If this most recent move in mortgage rates is stifling homebuyers, we’ll see the price reductions number jump in next Monday’s video. 

Some of the homes that are on the market and expected offers last week didn’t get their offers because of the most recent mortgage rate jump. If they don’t get the offer, then on Monday or Tuesday, a few are going to reduce their asking price to try to stimulate demand. 

Two takeaways from the price-reductions data: One, next week we will be watching for how many listings cut their prices as a result of newly higher mortgage rates. We can see that moment in September of 2022 when price cuts jumped and we saw it again last September when rates jumped. Will we see it again in next Monday’s data? 

And two, because price cuts are a bit high and climbing now, we have to look at that as a slightly bearish signal for home prices for the rest of the year. Transaction volume is climbing but prices do not appear to be climbing considering these levels of unaffordability. 

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