During the record housing boom of the past two years, a drastic shortage of homes for sale has plagued buyers and delighted sellers. Now the pressure is easing – a change that reflects a much-anticipated cooling in the white-hot housing market.
A normal market would be a wonderful thing for everyone.
—Christina PapasVice President of Keyes Co. Realtors in Miami and President of Florida Realtors
The abnormal conditions of the last two years have been brutal for buyers. Because demand for homes has exceeded supply by such a margin, buyers have faced steep price increases month after month. In desperation, many homebuyers have engaged in bidding wars and even waived contingencies for appraisals and inspections.
Housing economists measure the stock of homes for sale in months of supply. In January 2022, the number was just 1.6 months, an all-time high, according to the National Association of Realtors. The figure has increased every month since, reaching 1.7 months in February, 1.9 months in March and 2.2 months in April. In July, the number increased to 3.3 months.
The real estate rule of thumb says that a balanced market—one that favors neither buyers nor sellers—is characterized by five to six months of supply. So 3.3 months is still a seller’s market, that’s for sure. But the picture looks much less skewed today than it did a few months ago.
Are we in a “housing recession”?
As the housing market finally cools, economists and financial journalists are coining a new phrase: “housing recession.” Are we one? Yes and no, says Lawrence Yun, chief economist of the National Association of Realtors.
“We are in a real estate recession in terms of sales and housing starts, but we are certainly not in a real estate recession in terms of prices or homeowner sentiment,” Yun told reporters on Aug. 18.
Many American homeowners are sitting on top of huge equity gains after two years of a record run for home values.
Sales of existing homes fell in July for the sixth consecutive month, according to The most recent issues of NAR, reaching a seasonally adjusted annual rate of 4.81 million. Sales were down 5.9% from June and 20.2% year-on-year.
Meanwhile, homebuilders slowed housing starts. “Builders are naturally cautious,” Yun said. “They are reducing production.”
House prices also fell slightly. The median existing home price was $403,800 in July, up 10.8% from July 2021, but down from the record high of $413,800 set in June 2022.
Why the housing shortage is easing
The stock of homes for sale widened in part because home prices soared out of range, dampening demand. The median price of an existing home sold in the United States has been above $400,000 for three consecutive months.
Price increases, combined with a recent spike in mortgage rates, have created affordability issues for buyers. The average cost of a 30-year mortgage was just 3% in August 2021, according to Bankrate’s national survey of lenders. By mid-May, the number had jumped to 5.45%. “It makes people quit,” says Christina Pappas, vice president of Keyes Co. Realtors in Miami and president of Florida Realtors.
Yun says rising mortgage rates have frozen some sellers in place. Homeowners with 3% mortgage rates don’t want to give up their historic bargains, creating what he calls a “lock-in effect.”
“Maybe some people are locked into these low rates and don’t want to list their homes,” Yun says.
Andrew Sachs, a Keller Williams broker in Newtown, Connecticut, says he’s noticing signs of a cooler market. “There are fewer bidding wars. Maybe the seller gets the ask price, but he doesn’t get eight bids that push him above the ask price,” he says. “A salesman cannot ask for the world and get it [anymore]so everything is going to be more negotiable.
Over the past two years, buyers who wanted to strike a deal have been virtually forced to make aggressive offers on multiple properties. Now the pendulum could swing back in their favor. “We are seeing pockets of normalization,” Sachs says. “The more people who can buy homes, the healthier the overall economy will be.”
A shifting supply and demand equation
In the first two years of the pandemic, homebuilders said they couldn’t build fast enough to keep up with demand. These conditions have since changed. Even so, there is still no glut of homes for sale, for several reasons:
- Builders are still unable to build quickly. Homebuilders fell back after the last crash, and they never fully reached pre-2007 levels. Now there’s no way for them to buy land and get enough regulatory approvals. quickly to meet current housing demand. While they’re building as much as they can, the massive suburban developments that typically popped up before 2010 are now rare.
- Demographic trends create new buyers. There is strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger homes. Millennials, a huge group, are now in their prime buying years. And Hispanic buyers are a young and growing demographic who are also keen on home ownership.
- The usual supply valve is closed. In a counter-intuitive hot market outcome, owners are not eager to sell because they know they will have to fight to find another property. Plus, there are almost no foreclosures these days, taking a small but reliable source of homes off the market.
At the end of the line
The long-running housing shortage is finally easing, with inventory numbers rebounding from record highs. While some claim we are in a “housing recession”, not all experts agree. Home prices remain high, but are starting to fall and existing home sales are falling, helping the housing market return to equilibrium.