Housing Market Overview: Rising Rates, Spiking Prices, Rising Inventories

D. Lentz/iStock via Getty Images


With all of the first quarter housing data released, let’s take an in-depth look at the state of this highly advanced sector of the economy, which typically peaks about 6 or 7 quarters before the start. of the next recession, according to the historical model of Professor Edward Leamer.

Let me repeat my housing mantra:

  • interest rates drive sales
  • lead price
  • prices lead to inventory (especially for new homes, but also usually for existing homes)

While that doesn’t mean that inventory doesn’t have an effect on price, or that price doesn’t have an effect on sales, it *means* that the turning point for each has historically almost always been in the order defined above.

Interest rates drive sales

Let’s start by looking at mortgage rates and their effect on sales.

Here’s the long-term look at the past 50 years, showing rates (inverted, blue) versus single-family permits ((red)). I also include housing starts, on a quarterly average (golden line). This isn’t the best way to look at data, but let’s start there:

Mortgage rates vs housing permits


Although there is a lot of noise, in general, a drop in tariffs (represented by a recovery in blue) has generally led to an increase in permits. A rise in rates has usually led to a decline in permits, enough of which led to a recession.

The best way to show this is the YoY percentage change, which I’ve done below showing the last 10 years:

Mortgage Rates vs Permits % YOY Change


While other elements such as demographics come into play, it is clear that a year-over-year rate increase (inverted, blue) has always resulted in at least a strong deceleration in permits ((red) ), usually with a delay of 3 to 6 months. Housing starts generally turn slightly after permits. I included them in this analysis because of the large number (300,000, about 40% more than normal) of housing construction that did not start last year due to problems with the supply of building materials. . I also averaged them quarterly to reduce noise.

In addition, the increase in mortgage rates has already caused mortgage applications to fall to an almost 3-year low (excluding months of pandemic confinement):

Buy Mortgage Applications

Assoc. mortgage bankers. via Yardeni.com

Mortgage interest rates hit a low of 2.65% at the end of 2020. According to Mortgage News Daily, they are currently averaging 5.65%, slightly less than a 3% increase. Based on past history, we should expect a fall of around 20% yoy in housing construction at some point in the next 6 months.

Housing sales prices

The first chart below shows both the national Case-Shiller index (blue, left scale) in the chart below) and the FHFA buy-only house price index (purple) against the single-family permits (red, right scale) as shown above:

House Price Indices vs Permits


It is easy to see that permits drove prices both to the top of the housing bubble and to the bottom of the crisis. To show the more subtle comparisons over the subsequent 10-year expansion plus the coronavirus recession, I again use the YoY % changes in the following chart:

House price indices relative to permits Annual change


Again, there has typically been a 3-6 month lag between when housing permits turn around and when price changes pick up speed or slow down. The strong annual increase in permits that began in late 2019 only trickled down to prices after the March-April 2020 shutdowns. Permits and housing starts continued to soar into early 2021, and prices also skyrocketed. Since the beginning of this year, permits have turned slightly negative year-over-year, while housing starts have yet to turn. We should expect house price increases to slow sharply, or even reverse, by the end of the year.

House prices dominate inventories

The chart below again shows the Case-Shiller and FHFA home price indexes as above, and compares them with the number of homes for sale from the New Home Sales Report ((gold)), all measured year-over-year:

House price indices relative to new housing stock


Except for the fact that stocks are generally more volatile and were drawn down early before the 1990 recession, the relationship has remained intact for the past 30 years.

While the primary relationship between price and inventory has been consistent when it comes to *new* homes, in the post I also want to address existing home sales.

Eight years ago, shortly after I started writing about these relationships, I included the following chart of existing home sales, prices, and inventory through early 2014:

Existing Home Sales vs. Inventory through 2014


Since then, the NAR has only allowed FRED to publish its data for the previous year. Also, since the inventory data published by the NAR is not seasonally adjusted, the YoY relationship is the only good way to measure it – making one-year information virtually meaningless. Fortunately, several other authors have published long series of year-over-year sales or existing inventory data. Additionally, I have also backtracked and individually calculated turning points for each over the past 8 years.

Here are the last 5 years of existing home sales, calculated year-over-year, through the end of 2021, via Wolf Street:

2017-21 YoY Existing Home Sales

Realtor.com via Wolf Street

Sales turned negative year-on-year in March 2018, turned positive again in July 2019, then negative again in August 2021. And have remained negative ever since.

Now here is the annual % change in existing home inventory from 2018 to last month:

Inventory of existing houses 2017-22

Realtor.com via Redfin

Inventory turned positive in June 2018 (3 months after sales turned negative), then negative in July 2019 (the same month sales turned positive), and has remained negative ever since, although as you can tell note, the trend tends to become positive. .

In short, even with existing homes, sales drive prices, which in turn drive inventory, although sometimes inventory and sales move in opposite directions almost simultaneously – but even then sales are slightly ahead.

To summarize with respect to prices versus inventory, house prices, while rising, slowed from 2019 and only rose sharply after the pandemic shutdowns in early 2020. Meanwhile, inventories continued to decline year-over-year, with the level of year-over-year decline appearing to bottom in early 2021. With the sharp price increase in 2021, as expected, inventories are declining at a slower pace of a year on the other since then, and we can expect them to increase over the next few months.


The above review of the housing market has shown that since the pandemic hit, it has behaved in line with the pattern.

In 2020, with historically low interest rates, new home sales and construction have skyrocketed. Prices followed. As buyers looked to purchase a home, inventories continued to fall. But as interest rates climbed higher and higher over the past 16 months, sales and construction peaked. Price increases are also likely to peak; while stocks are about to rise again.

The pattern is most analogous to the 2003-06 boom or bubble period. Even as sales growth slowed and then reversed, prices rose more and more at a healthy pace, while inventories, which had been slowly shrinking, reversed course and rose. Even after the price dam broke, inventories continued to rise before finally following both sales and prices.

I expect a similar scenario to unfold over the next 12-24 months. And it goes without saying that with housing being such a large component of long-term leading indicators, the likely intensification of the slowdown in housing construction will have a significant negative impact on the broader economy over this period.