Green Shoots for Housing Inventory

The spring housing season is almost over, and the results have been mixed. Both existing and new home sales dipped in April, though prices remain elevated. The median existing-home sales price was $407,600 in April, and  $433,500 for a new house. Those numbers have jumped due to the pandemic-era frenzy for real estate. Four years ago, the median was $304,144 and today, it is $432,903, according to Redfin. That’s a 42 percent increase, or roughly two times the overall inflation rate for the time period.

The main culprit for surging home prices is lack of inventory in the existing home market, which accounts for 85-90 percent of overall sales. Through April, the inventory of unsold existing homes was 1.21 million, or the equivalent of 3.5 months' supply at the current monthly sales pace. While this is better than a year ago, the National Association of Realtors says a 6-month supply is typically necessary for a balanced real estate market.

One big hurdle holding back homeowners from listing their properties is the rock-bottom mortgage rates that they have. An astounding 58 percent of outstanding mortgages have rates that are under 4 percent. This creates a “lock-in” effect, meaning that it’s hard for current owners to give up those cheap rates and buy a new home. According to economists at the Federal Housing Finance Agency, the lock-in effect led to a 57 percent reduction in home sales and prevented 1.33 million sales from mid-2022 to through the end of 2023.

Before throwing in the towel on your housing search, housing experts say that inventory should improve because of the so-called 3 D’s: Death, Divorce, and Disease. There are also those who need more space to accommodate families; are downsizing and don’t need a mortgage for the new home; or are moving for a new job or location.

Additionally, builders have made great strides to pump up inventory of new homes. The seasonally adjusted estimate of new houses for sale at the end of April was 480,000, which represents a supply of 9.1 months at the current sales rate, a big improvement from the all-time record low of 3.3 months in August 2020. (For new homes, 4 to 6 months of supply is considered normal, and the all-time record high was 12.2 months of supply in January 2009, after the housing boom went bust.)

Realtor.com reported inventory was up 30.4 percent from a year ago but is still down almost 36 percent compared to April 2017 to 2019 levels. Until we see a combination of more inventory and lower mortgage interest rates, affordability will still be an issue. According to the Federal Reserve Bank of Atlanta, it takes around 40 percent of the median household income to cover monthly principal and interest costs of a mortgage, property taxes, insurance, and private mortgage insurance. That’s a huge jump from the average of around 25 percent over the past 35 years and explains why would-be buyers feel priced out of the market.

The combination of more inventory and lower mortgage rates should eventually improve affordability. For those in the market, the numbers can work, but you may need to be creative with financing. Consider an adjustable-rate mortgage, which decreases the amount of interest for a fixed period, with an eye towards refinancing or moving during the term. You can also lower monthly costs by paying more upfront to buy down a mortgage rate, either permanently or temporarily. As you crunch the numbers, don’t forget to add in property taxes, homeowner’s insurance, which has jumped recently, and ongoing maintenance (1-3 percent of the purchase price annually.)