Why Home Prices Are Still Rising While Inventory Recovers

Anyone who is going to buy a house today knows that there is very little left for sale.

The housing market is just starting to emerge from the leanest years in history. The inventory of both new and existing homes is finally increasing, but there is suddenly something strange about the numbers: the supply of newly built homes seems far too high.

However, the numbers are misleading because of the unprecedented dynamics of the current housing market, which date back two decades to another unprecedented period in the housing market: the subprime mortgage boom.

That is precisely why house prices, which usually fall when supply is high, continue to rise.

The supply scenario

There is currently 4.4 months’ supply of both new and existing homes for sale, according to the National Association of Home Builders, or NAHB. Monthly supply is a common market calculation to measure how long it would take to sell all available homes at the current sales rate. A six-month supply is considered an evenly matched market between a buyer and seller.

Supply was already low at the start of this decade, but pandemic-driven demand pushed it to a record low in early 2021, with just two months of inventory. That shortage of homes for sale, combined with strong demand, sent home prices soaring more than 40% from pre-pandemic levels.

Now, supply is finally starting to rise, but the gains are mostly in the new-home market, not the existing market. In fact, there is now a nine-month supply of newly built homes for sale, nearly three times the supply of existing homes. The supply of new and old homes tends to be quite close together. New construction now makes up 30% of the total inventory, about twice its historical share, according to the NAHB.

Single-family homes in a residential area in San Marcos, Texas.

Jordan Vonderhaar | Bloomberg | Getty Images

“June 2022 recorded the largest lead ever in new home-month supply (9.9) over existing single-family home-month supply (2.9),” wrote Robert Dietz, chief economist for the NAHB. “This separation makes clear that an evaluation of current market inventory cannot simply examine existing or new home inventory in isolation.”

This unusual dynamic is being driven by both recent swings in mortgage rates and an unprecedented housing market disaster that began 20 years ago.

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The basis of today's difficult numbers

This housing market is different from any other because of economic forces that are different from any other. First, in 2005 there was a huge increase in home sales, home construction, and home prices, fueled by a surge in subprime mortgages and a frenzy of trading in new financial products backed by those mortgages.

That all came crashing down quickly, resulting in one of the worst foreclosure crises since the Great Depression and subsequent Great Recession. Single-family home starts plummeted from a high of 1.7 million units in 2005 to just 430,000 in 2011. In 2012, new homes made up just 6% of the total supply for sale, and even in 2020, housing starts had not recovered to their historical average of about 1.1 million units. They were at 990,000.

Then came the Covid-19 pandemic, and as consumer demand surged and mortgage rates hit more than a dozen record lows, builders responded. New home starts skyrocketed to 1.1 million in 2021. The Federal Reserve bailed out the economy, making home ownership much more affordable, and the new work-from-home culture had Americans moving like never before. Suddenly, supply was sucked into a tornado of demand.

Mortgage rate chaos

The current strange gap in supply between new construction and existing homes is also due to rollercoaster mortgage rates, which fell to historic lows at the start of the pandemic and then spiked to 20-year highs just two years later. Millions of borrowers refinanced at the lows and now have no desire to move because they would have to trade in 3% or 4% interest on their loans for today’s rate, which is around 7%. This lock-in effect has kept new listings from coming in.

It also put builders in the driver’s seat. Homebuilders had already ramped up production in the early years of the pandemic, with single-family home starts surging to more than 1.1 million in 2021, according to the U.S. Census, before falling back as mortgage rates soared. Builders were able to lower mortgage rates to keep sales going, but as of May, they were building at an annual rate of 992,000.

Resale listings improved slightly this spring as mortgage rates fell slightly, and active listings were up 16.5% in June compared to the previous year, Redfin said. Some of that increased supply, however, was due to listings sitting on the market longer.

“The number of homes on the market for at least a month has been increasing year-over-year since March, as new listings increased during that period, but buyer demand remained weak, as it has since mortgage rates began rising in 2022,” according to a Redfin report.

A house is listed for sale in Austin, Texas on May 22, 2024.

Brandon Bell | Getty Images

Growth at the bottom

On the resale market, supply is lowest in the $100,000 to $500,000 price range, according to the National Association of Realtors. That’s where most of today’s buyers are. Higher mortgage rates are driving them to look for cheaper homes.

Interestingly, while supply is increasing at all price points, it is increasing the most at that same lower price point, which means it is simply not enough. As quickly as homes come on the market, they go under contract.

For example, there is only a 2.7-month supply of homes for sale between $100,000 and $250,000, but the supply is up 19% from a year ago. Meanwhile, there is a 4.2-month supply of homes priced above $1 million, but the supply is up only 5% from a year ago.

This explains why home prices remain stubbornly high, even with improving supply. Prices in May, the last measurement, were 4.9% higher than in May 2023, according to CoreLogic. Profits have started to shrink slightly, but not everywhere.

“The continued stronger home price growth this spring has continued in markets where supply is well below pre-pandemic levels, such as the Northeast,” said Selma Hepp, chief economist at CoreLogic.

“Additionally, markets that are relatively affordable, such as those in the Midwest, have seen healthy price growth this spring.”

Hepp notes that in Florida and Texas, where the supply of homes for sale is growing relatively faster, prices are now lower than they were a year ago.

Although analysts expected prices to fall and mortgage rates to drop in the second half of this year, it remains to be seen whether rates will actually fall and whether the supply-demand imbalance will cool prices. If mortgage rates do fall, demand will certainly increase, putting more pressure on supply and keeping prices high.

“Yes, inventory is rising and will continue to rise, particularly as the mortgage rate lock-in effect diminishes in the coming quarters. But current inventory levels, on a national basis, continue to support new construction and some price growth,” Dietz added.

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