The numbers are misleading, however, because of the unprecedented dynamics of the current housing market, which dates back two decades to another unprecedented period in housing, the subprime mortgage boom.
This is precisely why real estate prices, which usually fall when supply is high, continue to rise.
According to the National Association of Home Builders (NAHB), there is currently a 4.4-month supply of new and existing homes for sale. Months of supply is a common calculation used in the market to measure how long it would take to sell all available homes at the current sales rate. A six-month supply is considered a balanced market between a buyer and a seller.
Supply was already low at the start of the decade, but pandemic-driven demand pushed it to a record low in early 2021, with just two months of supply. This shortage of homes for sale, combined with strong demand, has pushed home prices up more than 40% from pre-pandemic levels.
Supply is finally starting to pick up, but the gains are mostly in the new-build market, not the existing-build market. In fact, there is now a nine-month supply of new homes for sale, nearly three times the supply of existing homes. The months of supply of new and existing homes typically follow one another closely. New construction now accounts for 30% of the total inventory, about double its historical share, according to the NAHB.
Single family homes in a residential neighborhood of San Marcos, Texas.
Jordan Vonderhaar | Bloomberg | Getty Images
“June 2022 saw the largest lead on record in new home supply (9.9) over existing single-family home supply (2.9),” wrote NAHB Chief Economist Robert Dietz. “This distinction makes clear that an assessment of current market inventory cannot simply look at existing or new home inventory in isolation.”
This unusual dynamic is due both to recent fluctuations in mortgage rates and to an unprecedented disaster in the housing market that began 20 years ago.
This real estate market is unique because of unique economic forces. First, in 2005, home sales, home construction and home prices all spiked, fueled by an increase in subprime mortgages and a frenzy of trading in new financial products backed by those loans.
All of this quickly collapsed, triggering one of the worst foreclosure crises since the Great Depression and leading to the Great Recession that followed. Single-family home starts plummeted from a peak of 1.7 million units in 2005 to just 430,000 in 2011. By 2012, new homes accounted for just 6% of the total supply for sale, and even in 2020, housing starts had yet to return to their historical average of about 1.1 million units. They stood at 990,000.
Then the Covid-19 pandemic hit, and as consumer demand surged and mortgage rates hit more than a dozen record lows, builders had to respond. Housing starts surged to 1.1 million in 2021. The Federal Reserve bailed out the economy, making home ownership much cheaper, and the new work-from-home culture pushed Americans to move like never before. Suddenly, supply was sucked into a whirlwind of demand.
The current strange divide between new and existing homes is also due to the rollercoaster effect of mortgage rates, which fell to record lows at the start of the pandemic and then hit 20-year highs just two years later. Millions of borrowers refinanced at the lows and are now unwilling to move because they would have to go from 3% or 4% on their mortgages to the current rate of about 7%. This lock-in effect has caused new supply to dry up.
Builders have also taken control of the situation. Builders had already ramped up production in the early years of the pandemic, with single-family home production topping 1.1 million in 2021, according to the U.S. Census, before falling back as mortgage rates soared. Builders were able to cut mortgage rates to keep sales high, but as of last May, they were building at an annualized pace of 992,000 units.
Resale listings improved slightly this spring as mortgage rates edged lower, and in June, active listings were 16.5% higher than a year earlier, according to Redfin. Part of that increase in supply, however, is due to listings sitting on the market longer.
“The share of homes sitting on the market for at least a month has increased year over year since March, when new listing growth accelerated, but buyer demand has remained tepid, as it has since mortgage rates began rising in 2022,” according to a report from Redfin.
A home available for sale is shown in Austin, Texas on May 22, 2024.
Brandon Bell | Getty Images
On the resale market, supply is lowest in the $100,000 to $500,000 price range, according to the National Association of Realtors. That’s where the majority of today’s buyers are. Higher mortgage rates are pushing them to look for less expensive homes.
Interestingly, though, while supply is increasing across all price brackets, it is in the lowest price bracket that it is increasing the most, which means there simply isn’t enough. Homes are coming onto the market as fast as they can, and they are being sold under contract.
For example, there are only 2.7 months of supply of homes for sale between $100,000 and $250,000, but supply is up 19% from last year. Meanwhile, there are 4.2 months of supply of homes priced over $1 million, but supply is up only 5% from last year.
That explains why house prices remain stubbornly high, even as supply improves. Prices in May, the last time they were measured, were 4.9% higher than in May 2023, according to CoreLogic. The gains have started to taper off slightly, but not everywhere.
“Home price gains, which have been even stronger this spring, are continuing in markets where inventory is well below pre-pandemic levels, such as those in the Northeast,” said Selma Hepp, CoreLogic’s chief economist.
“Additionally, relatively more affordable markets, such as those in the Midwest, saw healthy price growth this spring.”
Hepp notes that Florida and Texas, which are seeing comparatively greater growth in the supply of homes for sale, are now seeing lower prices than they were a year ago.
Analysts expect prices and mortgage rates to decline in the second half of this year. It remains to be seen whether rates will actually decline and whether the imbalance between supply and demand will allow prices to decline. If mortgage rates do decline, demand will surely increase, further putting pressure on supply and keeping prices elevated.
“Yes, inventories are rising and will continue to rise, particularly as the mortgage rate lock-in effect diminishes in the coming quarters. But current inventory levels continue to support new home construction and some price growth nationally,” Dietz added.