The current state of the housing market is puzzling, to say the least. Supply levels are reaching unprecedented highs, especially in the newly built homes sector. However, the numbers do not tell the full story due to the unique dynamics of the current market. This shift in the supply-demand balance can be traced back to events that unfolded two decades ago during the subprime mortgage boom. Contrary to conventional wisdom, home prices continue to soar even as supply levels rise.
According to the National Association of Home Builders (NAHB), both new and existing homes currently have a 4.4-month supply available for sale. This figure is considered low, with a balanced market typically having a six-month supply. The pandemic-induced surge in demand caused supply levels to plummet to record lows of just two-months’ supply at the beginning of 2021. The shortage of homes, combined with strong demand, resulted in a substantial increase of over 40% in home prices from pre-pandemic levels.
The housing market has been subject to significant fluctuations over the past two decades, primarily driven by drastic changes in mortgage rates and unprecedented market events. The housing crisis of 2005, triggered by a surge in subprime mortgage lending, led to a severe downturn in the market. The ensuing Great Recession caused a massive decline in single-family housing starts, dropping from 1.7 million units in 2005 to just 430,000 in 2011. It took years for new home construction to rebound, with housing starts only reaching 990,000 by 2020, below the historical average of 1.1 million units.
The Covid-19 pandemic brought about a surge in consumer demand and record-low mortgage rates, prompting a rapid increase in housing starts to 1.1 million in 2021. The Federal Reserve’s efforts to stabilize the economy made homebuying more affordable, further boosting demand. The sudden spike in demand caused a tornado effect, resulting in a significant shortage of supply.
The current division in supply levels between new and existing homes can be attributed to fluctuating mortgage rates. Historically low rates at the start of the pandemic led to a surge in refinancing, causing a decline in new listings. With mortgage rates spiking to 20-year highs, many homeowners are reluctant to move. This trend has empowered builders, enabling them to maintain higher sales by adjusting mortgage rates. However, the inconsistency in mortgage rates has led to fluctuations in new home construction, with builders currently operating at an annualized pace of 992,000.
Despite an increase in supply, home prices have remained stubbornly high, driven by the imbalance between supply and demand. Prices have continued to rise, with the latest data showing a 4.9% increase compared to the previous year. While there have been slight reductions in price gains, particularly in regions with limited inventory, overall prices remain elevated. Analysts predict that prices may stabilize in the second half of the year as mortgage rates adjust, but the outcome remains uncertain.
As inventory levels continue to rise, particularly with the diminishing mortgage rate lock-in effect, new construction and price growth are expected to persist. However, the future of the housing market hinges on several factors, including mortgage rate fluctuations and the evolving supply-demand dynamics. While some regions are already experiencing price declines due to increased supply, others continue to see price appreciation. The coming months will determine whether prices will cool off or if the current trend of high prices will prevail.
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