Home sales are down 23% when comparing July of 2023 to July of 2022. Each market is different with some seeing around 40% less sales and some seeing 20% less sales. Bottom line is that there are less sales. Part of that is due to less demand because of higher interest rates but the overwhelming reason for the reduction of sales is the lack of inventory. The lack of inventory is causing a further lack of inventory as it makes it hard to want to sell when there are so little options to buy.
The below graph shows closed sales going back to 2008. You’d have to go back to 2012, which was the bottom of the housing market decline, to see sales as low as they are now.
The interesting thing is that with sales down as much as they are, prices are up 5% year over year. How is that you ask? Demand outweighs supply.
The question becomes: how do you add more supply to the market to balance the situation out? Building is not likely the answer as the cost to build is very high and there are not many places to build on as you get closer to the city.
Some say lowering the interest rates will increase inventory as then someone with a 3.5% mortgage is ok with selling that home if they can get a mortgage in the 4% - 5% range as opposed to taking on a 7% mortgage. My problem with that argument is that if interest rates go lower then you will likely see more demand flood the market which would not help the supply problem. We don’t need more demand right now.
Hard to tell how long we will be in this cycle but below are two scenarios where I can see inventory start to build. One is if interest rates go much higher than where they are. Think about it, if interest rates were at 10% - 12%, that would likely cause a lot of buyers to just throw in the towel and decide to not buy. If there was a significant reduction in demand then supply would build due to buyers not wanting to buy. The higher rates would make it more expensive for a home and the less they have for a monthly mortgage payment which would cause prices to fall and / or inventory to build because of buyers not willing to go to a certain price point.
The other way I see supply building is if we enter a recession where jobs are lost and homeowners can no longer afford the monthly payment. They decide they want to cash out and buy a lower priced home or move into a rental or with mom and dad! In a recessionary scenario, you may also see investors sell to access their cash and potentially some of these corporate buyers liquidate some of their home portfolios.
Neither of the above scenarios are good but it's hard to see a path to more inventory in the market without some sort of pain being associated with it. As always, it is “fun” being on the front lines where we can see how the market unfolds. If the market turns, we will be able to see it start to change as there are leading indicators that give insights on market shifts and I keep a close eye on them.
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