Are last year’s surprising home price gains evaporating? As interest rates climb again, some of the price signals are softening. Inventory is climbing vs. last year, and home prices have stayed flat for three weeks now. The price reductions data has turned less bullish for future sales also.
Mortgage rates are back over 7%. We can see the impact on homebuyer demand across several of our stats. And as demand slows, inventory grows. Inventory is up over last year and is about to turn the corner and start climbing for the spring selling season, probably within a couple weeks.
It’s not super bearish in the data. Even as money is more expensive and there are more sellers than a year ago, we can also see slight home sales growth over 2023. Dramatically few home sales was the story of 2023. We continue to see some growth off those very low levels.
The housing market data has been changing very rapidly this year. The economy has continued to be strong, so mortgage rates have defied expectations and remained very high.
New listings rise
New listings continue to show us that more sellers are interested in this market this year. With just under 50,000 new listings unsold coming to the market this week, that’s now 16% more than the same week a year ago. Each week, the percentage gains over a year ago keep improving.
For the housing market bears out there, any rising inventory is a red flag for the market to crash. There are some markets where inventory is no longer at the crisis shortage levels of the pandemic. Is it too much inventory? Is new supply growing out of balance with demand? It’s worth keeping an eye on.
Sellers easing back in the market
As a result of sellers easing back in, and lower demand from expensive money, there are now 494,000 single family homes on the market across the US. That’s basically flat from last week — just a fraction of a percent fewer homes on the market now than last week. The key is there is now 13% more active inventory than last year at this time.
Each week we have more sellers and each week that inventory spread over last year keeps growing. Inventory fell nationally this week but is up compared to a year ago. Last year, inventory fell by 1.5% in the mid-February week. This year it just inched lower. So the spread grew. This is the same trend we’ve been talking about for several months.
Regionally the Gulf States are where inventory is rising the most quickly — Southwest Florida, over to New Orleans and into Texas. Inventory is back at 2019 levels in many of these markets. Our Altos Market Action Index gauge has some of them in Buyer’s Opportunity for the first time in many years with inventory sufficiently high relative to demand.
On the other hand California in fact most of the West and much of the Northeast still has less inventory than last year, but pretty much the whole country is rising. Again, since no market has a lot of homes for sale, I interpret more supply as a mostly positive trend for the year.
New pendings grow
As inventory grows and new sellers grow, it was an encouraging week for new contracts too. This week saw 60,000 new contracts started for single family home purchases. That’s 9% more than the same week a year ago. If we can sustain 9% more sales over 2023, that will be excellent growth, but I’m no longer so sanguine that this is going to be easy. Last week was 3% sales growth over the previous year. This week is 9% growth. That rate will probably dip back down next week. The key here is that more sellers should mean more sales this year. The question is how many more sales.
The bearish scenario that we watch for is if inventory rises but sales do not. And we can see that when mortgage rates spike, sales take a hit very quickly. The economy has been very strong, stronger than expected, so interest rates have stayed higher for longer. Higher mortgage rates have resulted in fewer new contracts than I expected, say 6 weeks ago. Though this week was an encouraging return to growth with 9% home sales gains over 2023, this is something to keep our eyes on. If inventory rises but we do not see the corresponding growth in sales that would have us revising lower all the forecasts for 2024.
Price reductions increase
We can really see how sensitive home buyers are to higher mortgage rates when we look at the price reductions data. As of mid-February, 30% of the homes on the market have taken a price cut. This is in the normal range for this time of year.
But price reductions didn’t decline this week, which they often do in mid-February. That’s because mortgage rates have jumped over 7% again. When rates jump, a few offers don’t get made and a few more sellers cut their prices.
In strong housing market years, this part of February has declining price reductions each week. If you’re getting fresh inventory and you’re getting offers quickly, then each week fewer sellers have price cuts.
But this week we’re flat because mortgage rates are back over 7%.
Price reductions are a leading indicator for future sales prices. A home is on the market now, it doesn’t get any offers, does a price cut, gets an offer in March, closes in April. So this data lets us see several months into the future.
And what it’s telling us is that consumers are taking their time, bidding less aggressively or not at all as mortgage rates are higher. Now that’ll change quickly if we get lucky and rates fall.
Median price for single-family homes on the market is unchanged this week at $425,000. It’s not uncommon for home prices to cluster around the big round numbers and we’ve been at this level for three weeks now. I expect the median price for homes to tick up in the next couple weeks.
It’s worth noting that while we finished December with pretty strong price gains over the year prior, those gains seem to be compressing now. In the active market data here, home prices are just 1-2% higher than last year at this time. Mortgage rates have been climbing since the new year, so maybe that shouldn’t be surprising. Worth watching. Will home price gains evaporate if mortgage rates stay in the 7s?
It can be hard to communicate all this with buyers and sellers. There are folks on the sidelines waiting for rates to drop so they can swoop in for sudden bargains. But they may not realize how much competition is waiting right along with them. And meanwhile mortgage rates are actually rising. If you need to help buyers and sellers see the actual data, you should join us at Altos.
Mike Simonsen is the president and founder of Altos Research.
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