U.S. Housing Market Crossroads

July 10, 2023

Conflicting trends in recent months appear to indicate that the overall U.S. housing market is at a crossroads. In May 2023, median

U.S. home prices fell slightly, down 3.1% year over year to

$396,100. In addition, the number of homes for sale in the U.S. fell by 7.1% year over year to 1.4 million as of May, the lowest level since 2012. In June, the National Association of Realtors reported that sales of previously owned homes are down 23.2% since last spring.

What’s Behind These Trends?

Tight Inventory. Existing home inventory continues to be relatively low, with roughly a three-month supply, as current homeowners feel “locked in” and are reluctant to sell now unless necessary, given the much higher interest rates on new vs. existing mortgage loans. On the supply side, an encouraging sign is that housing starts on single-family homebuilding projects in May surged by 291,000 units, the largest increase since January 1990. But this is only one month’s data and unfortunately, this won’t result in a significant increase in completed new homes for several more months.

Mortgage Rates Are Way Up. Generally, higher interest rates on mortgage loans should cool housing demand, leading to lower sales prices and fewer home sales. The interest rate on a 30-year fixed-rate mortgage loan roughly doubled in 2022, rising from 3.2% in June 2021 to 5.9% in June 2022. While peaking in November of last year, current rates on this type of loan are still at elevated levels, roughly 6.9%.

Homes on Market Longer. In recent years, the presence of “all cash” buyers and tight inventory in major metro areas led to a frenzy of bidding wars during Covid, as remote workers began shifting from major cities to more distant cities. Homes going on the market were snapped up in hours or days. However, with the tight inventory the “days on the market” has grown over the past year but is still under 30 days. This is largely attributable to an estimated 2-4 million unit housing shortfall in the U.S., depending on varying estimates, and the aforementioned tight inventory.

Where do we go from here?

Rates. It is nearly impossible to predict interest rates with any precision, but inflation has recently moderated to close to 4%, the money supply (as measured by M2) has declined year over year for the first time in modern history, and many economic indicators are signaling contraction. Given these factors, we believe the most likely scenario is for stable to modestly declining rates over the next year or two.

Sales. The volume of home sales is likely to continue its downward trend in an interest-rate environment where mortgages approach 7%. Some market pundits predict another 10-15% decrease in U.S. home sales in the next 12 months.

Prices. Despite softening demand, overall inventory levels are tight, so home prices are not expected to decrease significantly. This expected price stability is intriguing, given that price levels are up 40% in many metropolitan areas from pre-pandemic levels.

Longer Sales Cycles. Some market watchers are calling for the average days on the market to increase between two and three times the current levels (implying 45-60 days or more).

It is early to extrapolate these trends, and there are several potential pathways as we move ahead from these crossroads. Naturally, these housing trends vary by region, driven by the local economy and job prospects, tax, school system, and many other personal and family factors. Please let us know if we can assist in evaluating the financial aspects of any housing decision you are contemplating.