Home prices are once again on the rise following a brief decline. But before would-be homebuyers start to worry about prices zooming higher from here, note the emerging evidence of a shift in the balance of power in the housing market: We’re seeing an unseasonal rise in inventory for existing homes on sale and sellers are becoming more motivated.
These factors set up a housing market that will look different in 2024 with increasing inventory taking some pressure off prices, presenting buyers with better opportunities to seal a deal.
I speculated early last month that the resale inventory picture could turn in the fall. The data that has come in since then give me more confidence in that hunch. At the time weekly new listings of homes were down 21.6% on a year-over-year basis, according to real estate brokerage Redfin Corp. Last week, they were down just 6.7%, and I suspect we will see these listings climb above the year-ago level within a month or two.
Here’s why. Sellers rushed to list their homes in the second quarter of 2022 as mortgage rates surged to get ahead of a possible crash, but the listings deluge turned into a drought as we ran out of anxious sellers. The remaining homeowners, most of whom had low mortgage rates or no mortgage at all, decided to sit tight for the long haul, or until interest rates fell. This well-discussed “mortgage rate lock-in effect” has been the story of the housing market this year, with a lack of sellers keeping home prices elevated, some would argue artificially.
We're now lapping the start of that "seller drought” on a year-over-year basis. Mortgage rates are high today, but they had surged to around 7% in the fall of 2022 as well. By now, the market is used to elevated mortgage rates. Homeowners may prefer to sell in an environment of lower rates, but a year on, incremental life events make it harder to hold on to homes that no longer suit people’s changing situations.
This is a big reason for resale inventories now rising at a faster rate than a year earlier. According to Altos Research, there are currently 25,000 more single-family homes for sale than there were four weeks ago — at a time of year when resale inventories are typically falling. Resale inventories rose by just 2,000 homes over the same four-week period last year.
Another interesting tidbit in the Redfin data is that while pending home sales are still down on a year-over-year basis, homes that are going under contract are doing so faster. A greater share of pending sales are going under contract within two weeks, and the median days on the market for homes that have sold is not rising as fast as a year ago. This suggests that sellers are a bit more motivated to sell and want to complete transactions before the winter lull.
Putting these three trends together — the “seller drought” abating somewhat, inventories rising at a time of year when they typically don't, and signs of more motivated sellers — I am growing optimistic that the housing market will be less dysfunctional in 2024. Depending on the balance between sellers and buyers, we could even see home prices start to fall again in some markets, with more meaningful declines in others.
This dynamic should be particularly pronounced in the markets that boomed during the pandemic, where moving is more common, where birthrates are higher, and where there's new multi-family housing supply flooding in. Someone who moved to Phoenix or Nashville during the pandemic is more likely to be in a home that they "grow out of" sooner, and would-be homebuyers
have a lot of new apartments to choose from if they feel like home sellers are being unreasonable.
The key is for this rising inventory trend to be sustained. More homes for sale will lead to more transactions, to the relief of those in the real estate business. But that won't translate to higher home prices — to the relief of long-frustrated homebuyers.
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