(Bloomberg Opinion) — The US housing market is in a precarious state of equilibrium. Demand fell as mortgage rates hit two-decade highs, but prices haven’t fallen much, in part because supply also remains low. If borrowing costs don’t start to normalize early next year, the scales could eventually tip and prices could fall.
The start of the year, of course, is when landlords and real estate agents start bringing new inventory to market. It’s an age-old tradition backed by smart strategy and a bit of industry tradition. According to the thought, buyers and sellers often want to close their deals by the summer, especially if they have kids starting new schools in September. Agents also say the homes are at their best in the spring, surrounded by lush landscaping and emerald green lawns. Even if there aren’t enough sellers this year, there could still be enough additional inventory to push home prices above the cliff.
Obviously, the amount of supply in the market is still extraordinarily small compared to demand. It would take just 3.3 months to scour the market’s existing home inventory, based on unadjusted data for the most recent month. The metric had already declined steadily for a decade until 2019, but the pandemic took it to unthinkable lows. It’s no wonder the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index is only down about 2% from its peak despite mortgage rates jumping 3% to 7 % in 10 months.
But each year, the inventory-to-sales ratio spikes in January and February as transactions slump and the first new listings begin to come online ahead of the spring open house season, which can trigger bad things in times of stress. In January 2008, supply jumped from four months of housing to 15 months, and there was a similar spike in each January of the housing crisis. The past two years have seen unusually muted peaks in the ratio, but that won’t be repeated this winter. If you zoom in, it’s already clear that the months supply has increased in an unusual seasonal way. The trend line will start to look concerning if it breaks above the 2018 and 2019 seasonal norms in the coming months.
Consider the various countervailing forces in the market ahead of the 2023 inventory surge. On the one hand, some potential sellers will decide to forgo deals this year and retreat to their existing homes, many of which will be financed with sub-3 % they would lose if they bought a new property. On the other hand, more than 30 million single-family homes and condominiums in the United States — 34% of the total — are mortgage-free, according to data compiled by real estate analytics firm Attom. And many other owners simply won’t have the luxury of waiting for the next open house season. They include, but are not limited to:
- People with growing families who need to buy a bigger house;
- Elderly people who have to move for health reasons;
- People forced to travel for work.
On this last point, housing bulls will often emphasize what they see as the cosmic shift that comes with the rise of working from home. But that does not mean that Americans will no longer travel for their work. Hybrid working in knowledge-based industries certainly looks set to endure, but many companies no longer allow full-time work from whatever palm-lined destination their employees choose. In June, only about 15% of full-time employees were fully remote, according to data from the Work Arrangements and Attitudes Survey, an online survey of U.S. residents. That’s still much higher than anyone ever imagined before the pandemic, but that still leaves 85% who may have to sell their home if they get fired or quit their job for a new one in another part of the country. .
All told, the inventory spike in early 2023 seems inevitable, and the real question is where mortgage rates will be when listings hit the market. If inflation continues to moderate, this could lead financial markets to anticipate a change in monetary policy later next year. This would pave the way for a rally in Treasuries and a corresponding drop in mortgage rates. It’s a race against time, though, and you have to hope for a near-perfect run of inflation data to soothe jittery policymakers and financial market participants and bring 30-year mortgages down to, say, 6 %. Even then, rates are unlikely to look as attractive as the lending that has prevailed for most of the past decade, and they may not be enough to keep the delicate balance of the market intact and prices afloat. .
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To contact the author of this story:
Jonathan Levin at [email protected]
Based on research by Jose Maria Barrero of the Instituto Tecnologico Autonomo de Mexico; Nicholas Bloom of Stanford University; and Steven J. Davis of the University of Chicago Booth School of Business.
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