Low inventory fueling a hot market, for the few who are in it
Home values are up, and so are bidding wars, according to the latest Zillow market data.
Key points:
- Zillow found that home values rose 1.4% between April and May, the biggest jump since last June.
- Buyers who no longer want to wait out the market are competing for a limited supply of homes, resulting in more bidding wars.
- With inventory gridlocked, economists are unsure what will break the logjam, as variables such as interest rates, appreciation and wage growth remain hard to predict.
The real estate market may have cooled relative to its pandemic-era peak, but the lack of homes for sale means buyer competition is heating up.
Based on its latest market data, Zillow found typical U.S. home values rose 1.4% between April and May, the strongest monthly appreciation since last June. That put Zillow's typical home value at $346,856, which is up less than 1% compared to a year ago, but 3.4% higher than in January.
Why the big jump since the beginning of the year? Supply and demand: There are few homes on the market, but still enough buyers to create bidding wars on those limited options, said Zillow Senior Economist Jeff Tucker.
"Spring is traditionally the hottest time of year in the housing market, and 2023 has been no exception. Time will tell if seasonal price slowdowns arrive on time this year, later in summer," Tucker said.
Although inventory is up slightly compared to the last two springs, it remains well below pre-pandemic norms. Last month, 582,032 homes were available for sale, which is less than half of what was available in May 2019, according to Realtor.com.
Market dynamics are changing
With would-be sellers reluctant to give up their ultra-low interest rates, the dynamics of who is buying or selling a home have changed.
"We are in the 'Life happens' housing market, where marriage, divorce, death, downsizing, and family expansions are driving today's sales," Ali Wolf, chief economist at Zonda, posted on Twitter.
This new market reality is unlikely to change unless mortgage interest rates come down to the 5% range, or if homeowners with ultra-low rates have built up sufficient equity to make a substantial down payment on their next home, said Rick Sharga, founder of the consulting firm CJ Patrick Company.
"This scenario also supposes that home price appreciation either stays fairly low — perhaps in the 3-4% rate annually — or even declines slightly in some markets, and that wage growth continues to be steady," Sharga said.
Even with the current gridlock, Tucker expects seasonal listings to increase, peaking in August.
"But in the long run it is hard to predict how much progress it will make toward normal levels," Tucker said. "If we continue to see reluctant sellers and low inventory, we'll see competition stay elevated for the limited options available. There's no clear mechanism for what might break open any hypothetical logjam of inventory."
A big drop in mortgage rates seems remote for now. Tucker doesn't expect rates to hit the 6.0% level until 2024, while Sharga believes rates will gradually start declining in the second half of 2023.
Monthly payments on the rise
As prices continue their slow climb and mortgage rates remain high, monthly payments have also gone up, according to the Zillow report. A new loan on a typical home in the U.S. would require a monthly mortgage payment just shy of $1,800. That's 22% higher than last year and the second-highest amount on record after October 2022, when average mortgage interest rates peaked at just over 7%.
Rising home prices have also prompted Zillow to change its price forecast for the rest of the year. The company now expects home values to end 2023 at least 5% higher than at the end of 2022. Last month it forecast a 3.9% year-over-year rise.
As prices rise, however, sales may decline. Zillow predicts that 4.2 million existing homes will be sold in 2023, a 17% drop from 2022. That was revised downward from last month, when Zillow forecast 4.4 million sales.
Midwest, West Coast seeing biggest jumps
As buyers continue to chase affordability, home appreciation is rising the most in the Midwest, with six of the seven metros in that region posting the biggest gains according to the report. Columbus, Ohio, had the biggest monthly jump at 2.2%, followed by Cincinnati, Detroit, Richmond and Milwaukee.
West Coast metros that posted big price drops last winter are starting to bounce back as well, with San Jose (up 1.9% month over month) Seattle (up 1.7%) and San Francisco (up 1.4%) leading the way.