Lately the housing market has faced a different conundrum at every turn. This year’s puzzle is the disconnect between an aggressive rise in the number of existing homes for sale and still sluggish transactions.
There are two reasons for this. The first has to do with which markets are seeing the fastest growth in resale inventory, while the second is more about the “vibes.” The bottom line is that in most of the country, even as the number of for-sale homes increases, we can still expect sellers to wait for buyers to come to them rather than chasing would-be buyers with discounts.
For all the talk about the mortgage rate lock-in effect keeping owners from listing their houses, resale inventory climbed a substantial 35% year-over-year through May at the national level, according to data from realtor.com. There are currently more homes for sale in the US than there have been since July 2020.
Yet, as of April, existing home sales have fallen compared with a year ago, even though they are off last year’s lows. Mortgage purchase applications have barely inched up, suggesting any uptick in transactions is largely down to all-cash buyers. Data from Altos Research shows that after healthier increases in March through the early part of May, the number of homes going into contract as we exited last month barely grew from a year earlier.
A paucity of inventory was blamed for weak transactions last year, but what explains this year’s anemic sales? The answer lies in where we’re getting that inventory growth. We’ve seen an especially large increase in Florida, as well as substantial increases in some of the other Gulf Coast states and Arizona. But, as Lance Lambert of housing analytics site ResiClub notes , zooming out to look at how things have changed on a five-year basis shows that most of the country has significantly fewer homes for sale today.
In Connecticut, for instance, there are 77% fewer homes for sale now versus 2019. Only a handful of states, led by Florida, Texas and Arizona, are still in the neighborhood of where they were five years ago. More stock helps, and should lead to more transactions over time, but most of the country remains substantially constrained on this front.
Additionally, the psychological dynamics of housing market participants are probably underappreciated. Over the past 18 months, we’ve had several mini rate cycles driven by shifts in the economic data and views about what the Federal Reserve does next.
At first, the fear was that elevated inflation would lead to more interest rate hikes and bring on a recession — dynamics that worried buyers and sellers alike. Over the past six months, markets have swung between two scenarios: An economy that is too strong for policy easing, or one where cooling inflation will allow some reduction. Mortgage rates have risen and fallen depending on the data flow. Neither scenario has involved a particularly elevated risk of recession and, as a result, there is no reason for sellers to worry about not finding buyers or about home prices falling significantly.
There are now a growing number of owners looking to sell, but with recession taken out of the equation, they haven’t yet felt any urgency to meet buyers where they are. Everybody knows that there’s a housing shortage and millions of Americans are looking to buy, leading sellers to be patient and buyers to rush in whenever we get any kind of decline in mortgage rates or a softening in asking prices. For buyers on the hunt, affordability continues to be the big constraint.
This sentiment is borne out by a recent survey from the National Association of Realtors which showed that confidence among home sellers rose in April despite the pick-up in inventory, while the median number of days a house stayed on the market fell to 26 from 33 in March. About 28% of sales were all cash.
I still wonder if the confidence that sellers are feeling will start to wane as moving season begins to wind down and fewer would-be buyers feel the urgency of making a decision before the new school year begins. Absent a drop in mortgage rates, that could shift market dynamics more in favor of buyers this fall as sellers start to worry about having to wait till next spring to offload their homes.
Maybe that would bring more psychological balance to the market and generate more transactions. For the time being, inventory isn’t increasing where buyers want to buy, and both sides have shown with their actions that sellers retain the upper hand.
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