Economic Woes Push Home Supply Up for First Time in Years

US inventory of homes for sale rose in June, the first time this has occurred YoY since before the pandemic, according to Redfin.

About the 2% boost, Redfin chief economist Daryl Fairweather said in prepared remarks, “The country’s economic woes have already cooled the housing market, and they’re likely to continue dampening demand.”

High mortgage rates are a primary reason for keeping buyers on the sidelines, leading to the build-up of supply. High home prices and a faltering economy also contributed, “creating a more balanced market,” the report said.

Inventory Still in State of ‘Crisis’

John Hunt, founder and chief analyst at MarketNsight, notes that 2% is less than half of what it was in 2019. 

“This is not as bad as you would think it would be given all of the negative news and increasing rates,” he tells GlobeSt.com. “We still have a lack of inventory crisis in this country of epic proportions.”

Affordability ‘Crushing’ Homebuyers

Crystal Sunbury, construction and real estate senior analyst with RSM US LLP, tells GlobeSt.com that the rapid rise in mortgage rates, with the 30-year mortgage rate reaching 5.74% on July 8 over 200 basis points since January, combined with record home appreciation, have crushed affordability for many potential buyers. 

The median home price increased from $354,000 to $408,000 over January to May, she said. The increases in home prices and mortgage rates have increased monthly payments by nearly 50%. Meanwhile, median family income is estimated to have risen 2.9% over the same period. 

“This has stretched affordability, pushing many buyers to the sidelines, softening demand considerably over the last couple of months,” Sunbury said.

Sunbury said the housing market consists of resale and new builds. Inventory of existing homes has been constrained, but steadily increased since March, reaching 1.16 million units in May, according to the National Association of Realtors.

“However, this represents only 2.6 months of supply and remains below pre-pandemic levels,” Sunbury said. “Constraints in the resale market pushed many buyers into the new home market. Despite supply chain woes and labor constraints, new inventory has risen steadily since 2020 in response to the increased demand, and reached 444k units in May, according to the U.S. Census Bureau, the highest since 2008.

‘Massive Wave of Resale Listings’ Unlikely

“While supply of resale homes is coming back into the market as a result of sellers accelerating their timelines to sell to not miss out on the market conditions, it is unlikely that we’ll see a massive wave of resale listings, given that homeowners are likely to opt to maintain their low rate locked in mortgages and not sell if they don’t have to.”

Sunbury said that during the pandemic, many builders shifted their strategies to delay sales to later in the construction cycle. 

“This means that many of the homes in production have not been sold and we should expect to see a wave of this inventory hitting the market,” she said. “Pricing of this inventory and incentives offered by builders will reflect current market conditions as builders manage their inventory volumes.

Sales will likely fall during the second half of the year, and we will likely see some market corrections; however, we do not expect to see a sharp pull back in sales, as household formations remain strong and buyers continue to seek shelter from inflationary pressures.”

Many Buyers Sitting on Their Hands

Erin Sykes, chief economist, Nest Seekers International, representing Palm Beach, Miami, Hamptons, and New York, tells GlobeSt.com that many buyers are sitting on their hands now due to economic uncertainty, but they should actually be capitalizing on added inventory coupled with moderate interest rates. 

“At 5.5% for a 30-year fixed, mortgage rates are actually down from last month but that won’t last long. As we approach the next Fed meeting, they will likely tick up in anticipation. My advice to buyers is to lock their rate now and start shopping. It’s been a while since buyers have been in the driver’s seat and now is the time to take your power back.”

Fairweather added, “I advise sellers to commit: If you decide to sell, do it quickly before demand falls further. And price carefully—this is not the time to test the waters. You’ll do more harm than good if you overprice and have to do a price reduction or take the home off the market.”