Low inventory may continue to plague buyers
The housing slowdown, while offering modest relief for buyers, is being offset by high interest rates that are keeping prospective sellers out of the market.
Key points:
- Despite a slowdown in sales, housing inventory only rose to 3.2 months in August, keeping it a sellers market.
- Higher interest rates could make potential sellers (who are also buyers) less willing to give up locked-in low rates.
- Interest rate increases are also expected to slow down new construction, further keeping inventory low.
The sudden rise in interest rates throughout 2022 is expected to keep inventory of residential homes low for the coming months.
Nationwide, housing inventory was estimated to be 3.2 months in August, according to a recent report from the National Association of Realtors. Despite a significant slowdown in sales and some month-to-month price reductions, this is still considered a sellers market. A balanced market is generally considered to have between 4-6 months of inventory; in a buyers market, inventory would exceed six months.
Higher interest rates are likely causing sellers to delay listing their homes, said NAR Chief Economist Lawrence Yun.
"Inventory will remain tight in the coming months and even for the next couple of years," Yun said in a news release accompanying the data from NAR. "Some homeowners are unwilling to trade up or trade down after locking in historically-low mortgage rates in recent years, increasing the need for more new-home construction to boost supply."
Nicole Bachaud, senior economist at Zillow, added that Zillow surveys indicate 71% of sellers are also buyers, making them keenly attuned to interest rates as they shop for a new home.
"Once things smooth out as the rebalancing settles down, we can expect that behaviors will shift back to a more normal housing market pace," Bachaud said in an email, adding that Zillow's survey of economists predicts that inventory will eventually rise, shifting to a buyers market at the end of 2023.
Inventory far from the levels preceding the Great Recession
Today's low inventory contrasts with the housing market in 2008, when the global financial crisis resulted in steep drops in prices and left many homeowners underwater, said Rick Sharga, executive vice president at ATTOM.
He noted in the run-up to the financial crisis, inventory was around 13 months, more than double what a balanced market could consume.
"That led to price wars, and home price declines, at precisely the time 15 million ARM loans were resetting at higher rates that the borrowers couldn't afford," Sharga said in an email.
Sharga added that if inventory increases, he expects it to be marginal, meaning it could take a while for some areas to approach a balanced market. Markets that have a ways to go include most of Washington state, where the Northwest Multiple Listing Service reported just 2 months of inventory in September, and the north Texas region, which includes the Dallas/Fort Worth metro area. North Texas Real Estate Information Systems reported an inventory of 2.5 months in its coverage area.
Still, buyers have reason to be optimistic. "Though technically still a seller's market, it is more favorable to buyers than it has been in a decade," said John Deely, executive vice president of operations at Coldwell Banker Bain, in the NWMLS report.
New construction not expected to boost single-family inventory
Housing permits are down annually for the first time since the beginning of the pandemic and below consensus expectations, signaling that tight inventory can be expected to remain a key player in the future of the housing market, said Bachaud. "Low inventory will continue to push long-term price growth up and affordability down."
With interest rates in the upper 6% range in September, it's unlikely builders will soon change their course of action, keeping low inventory levels in place.