Here’s where housing inventory might be headed in 2023
After years of low inventory, Mike Simonsen of Altos Research expects housing inventory to approach more normal levels by the end of summer 2023.
Key points:
- If rates remain around 7%, the inventory buildup would be steady starting in the first quarter.
- There’s an expectation that year-over-year prices will be flat across the U.S. in 2023, but could decline if interest rates remain at current levels or continue to increase.
Although some would-be sellers are sitting on the sidelines, hoping to wait out the downturn, inventory continues to build and could approach previous normal levels by the end of next summer.
That's the conclusion from Mike Simonsen, CEO of Altos Research, during a Nov. 9 webinar. But it comes with a major caveat: It depends on what happens with interest rates.
Last week, inventory levels were around 575,000 — significantly higher than last year's 400,000 level, but well behind 2019, when inventory was 919,000. It's not an even spread, however; inventory is climbing more quickly in pandemic boomtown areas, with some of those metro areas already approaching 2019 inventory levels.
It's unusual for inventory to be climbing in late fall, but that has more to do with the market than seasonality. Simonsen expects inventory to level off and go down in the coming weeks as people turn their attention to Thanksgiving and the winter holidays. The traditional dropoff in inventory in the final weeks of 2022 could be less than in recent years because of the slowdown in demand.
After the holiday season, one scenario Simonsen sees is a steady rise in inventory as new sellers enter the market, whether due to life changes or because investors need some liquidity. If interest rates remain around the current level, demand will remain slow.
"At 7.25%, they (buyers) are going to have to hold off," Simonsen said, because higher rates have made mortgage payments less affordable compared to early in the year. "As we're looking forward, if we see mortgage interest rates drifting down a little bit… that will be an encouraging sign to do transactions."
The magic number? About 5.5%. At that level, more potential buyers may enter the market, a trend seen briefly over the summer according to the Altos data. If rates were to drift down to that level, then inventory levels will remain tight and not approach 2019 levels.
If interest rates stay in the 7% range and inventory continues to build through weak demand, that will lead to further price reductions. The median home list price of a single family home peaked at around $450,000 in June, falling to $425,000 by November. It's expected to fall further to around $400,000 by the end of 2022.
As for 2023, Simonsen said the market will get a good indication of what will happen with prices by the first quarter, a time when new inventory traditionally comes into the market. The expectation is that home prices will be flat year-over-year in 2023, but if interest rates remain around 7% or rise further, that could lead to year-over-year price declines because demand doesn't materialize in the spring.
One leading indicator that's pointing toward price declines is the number of active listings with price reductions, which is still climbing in November, hitting 43.2% nationally.
"This is a bearish signal for home prices for next year because… about 33% is normal nationwide," Simonsen said. "Demand (now) is significantly softer than normal, so sellers have to reduce the price."
Pandemic boomtowns are seeing some of the highest percentages of price reductions. Boise, Idaho had price reductions for 64% of its listings on Nov. 9, followed by Phoenix (63%) and Austin (61%).