It suddenly looks like there are too many homes for sale. Here’s why that’s not quite right

Anyone
out
shopping
for
a
home
today
knows
there
is
still
precious
little
for
sale.

The
housing
market
is
just
beginning
to
come
out
of
its
leanest
few
years
in
history.
Inventory
of
both
new
and
existing
homes
is
finally
rising,
but
there
is
something
suddenly
strange
in
the
numbers:
The
supply
of
newly
built
homes
appears
to
be
way
too
high.

The
numbers,
however,
are
deceiving
due
to
the
unprecedented
dynamics
of
today’s
housing
market,
which
can
be
traced
back
two
decades
to
another
unprecedented
time
in
housing,
the
subprime
mortgage
boom.

All
of
it
is
precisely
why
home
prices,
which
usually
cool
off
when
supply
is
high,
just
continue
to
rise.

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

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

Now
supply
is
finally
beginning
to
climb
back,
but
the
gains
are
mostly
in
the
new
home
market,
not
on
the
existing
side.
In
fact,
there
is
now
a
nine-month
supply
of
newly
built
homes
for
sale,
nearly
three
times
that
of
existing
homes.
New
and
old
home
months’
supply
usually
track
pretty
closely.
New
construction
now
makes
up
30%
of
total
inventory,
about
twice
its
historical
share,
according
to
the
NAHB.

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

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

This
housing
market
is
unlike
any
other
because
of
economic
forces
unlike
any
other.
First,
in
2005,
there
was
a
massive
runup
in
home
sales,
homebuilding
and
home
prices
fueled
by
a
surge
in
subprime
mortgage
lending
and
a
frenzy
of
trading
in
new
financial
products
backed
by
these
mortgages.

That
all
came
crashing
down
quickly,
resulting
in
one
of
the
worst
foreclosure
crises
since
the
Great
Depression
and
causing
the
ensuing
Great
Recession.
Single-family
housing
starts
plummeted
from
a
high
of
1.7
million
units
in
2005
to
just
430,000
in
2011.
By
2012,
new
homes
made
up
just
6%
of
the
total
for-sale
supply
and,
even
by
2020,
housing
starts
had
yet
to
recover
to
their
historical
average
of
about
1.1
million
units.
They
sat
at
990,000.

Then
came
the
Covid-19
pandemic
and
during
that
time,
consumer
demand
surged
and
mortgage
rates
set
more
than
a
dozen
record
lows,
so
builders
responded.
Housing
starts
shot
up
to
1.1
million
in
2021.
The
Federal
Reserve
was
bailing
out
the
economy,
making
homebuying
much
cheaper,
and
the
new
work-from-home
culture
had
Americans
moving
like
never
before.
Suddenly,
supply
was
sucked
into
a
tornado
of
demand.

The
current
strange
divide
in
supply
between
newly
built
and
existing
homes
is
also
due
to
roller-coaster
mortgage
rates,
dropping
to
historic
lows
at
the
start
of
the
pandemic
and
then
spiking
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
a
3%
or
4%
rate
on
their
loans
to
the
current
rate,
which
is
around
7%.
This
lock-in
effect
caused
new
listings
to
dry
up.

It
also
put
builders
in
the
driver’s
seat.
Homebuilders
had
already
ramped
up
production
in
the
first
years
of
the
pandemic,
with
single-family
homes
surging
to
more
than
1.1
million
in
2021,
according
to
the
U.S.
census,
before
dropping
back
again
when
mortgage
rates
shot
up.
Builders
have
been
able
to
buy
down
mortgage
rates
to
keep
sales
higher,
but
as
of
this
May,
they
are
building
at
an
annualized
pace
of
992,000.

Resale
listings
improved
slightly
this
spring,
as
mortgage
rates
fell
back
slightly,
and
by
June,
active
listings
were
16.5%
higher
than
they
were
the
year
before,
according
to
Redfin.
Some
of
that
increased
supply,
however,
was
due
to
listings
sitting
on
the
market
longer.

“The
share
of
homes
sitting
on
the
market
for
at
least
one
month
has
been
increasing
year
over
year
since
March,
when
growth
in
new
listings
accelerated, but
demand
from
buyers
remained
tepid,
as
it
has
been
since
mortgage
rates
started
rising
in
2022,”
according
to
a
Redfin
report.

On
the
resale
market,
the
supply
is
lowest
in
the
$100,000
to
$500,000
price
tier,
according
to
the
National
Association
of
Realtors.
That
is
where
the
bulk
of
today’s
buyers
are.
Higher
mortgage
rates
have
them
seeking
cheaper
homes.

Interestingly,
however,
while
supply
is
increasing
across
all
price
tiers,
it
is
increasing
most
in
that
same
lower-end
price
tier,
meaning
it
is
simply
not
enough.
As
fast
as
the
homes
are
coming
on
the
market,
they
are
going
under
contract.

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

This
explains
why
home
prices
remain
stubbornly
high,
even
with
improving
supply.
Prices
in
May,
the
latest
reading,
were
4.9%
higher
than
May
2023,
according
to
CoreLogic.
The
gains
have
begun
to
shrink
slightly,
but
not
everywhere.

“Persistently
stronger
home
price
gains
this
spring
continue
in
markets
where
inventory
is
well
below
pre-pandemic
levels,
such
as
those
in
the
Northeast,”
said
Selma
Hepp,
chief
economist
for
CoreLogic.

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

Hepp
notes
that
Florida
and
Texas,
which
are
seeing
comparatively
larger
growth
in
the
supply
of
homes
for
sale,
are
now
seeing
prices
below
where
they
were
a
year
ago.

While
analysts
have
expected
prices
to
ease
and
mortgage
rates
to
come
down
in
the
second
half
of
this
year,
it
remains
to
be
seen
if
rates
will
actually
come
down
and
if
the
supply-demand
imbalance
will
allow
prices
to
cool.
If
mortgage
rates
do
come
down,
demand
will
surely
surge,
putting
even
more
pressure
on
supply
and
keeping
prices
elevated.

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