Today’s existing home sales report shows that the existing home market is now almost balanced. That might sound strange, but like most things I do, I have a model for it. We are very close to getting this balance nationally and in some markets we’re already there. I have often discussed four months of supply and active inventory between 1.52 and 1.93 million as a balanced market, but this equation has a second variable tied to today’s housing economics: affordability.
In the previous decade, active inventory ranged between 1.52 million and 2.4 million using data from NAR, with months of supply often over four months. But housing was more affordable back then — not so much now. The affordability issues we are now seeing make the housing market more balanced in the supply levels between buyers and sellers. We’re already seeing a buyer’s market in some of the more expensive markets that have to deal with higher levels of housing inflation, such as in parts of Texas and Florida.
From NAR: Existing-home sales fell in June as the median sales price climbed to the highest price ever recorded for the second consecutive month, according to the National Association of REALTORS®. All four major U.S. regions posted sales declines. Year-over-year, sales waned in the Northeast, Midwest and South but were unchanged in the West.
In March, I wrote that the monthly existing home sales had peaked and this would be the case unless mortgage rates fell. So far, that call has proved right. Some 2024 existing home sales data is similar to 2023. In late 2022 and early 2023, mortgage rates dipped more than 1% and purchase apps had a positive streak that filtered itself into sales prints. However, mortgage rates shot up again, making our weekly housing market tracker data go negative, and when rates didn’t fall back, it laid the groundwork for a seasonal sales peak in February.
This can change quickly if mortgage rates head toward 6% or lower. However, we would need to see the labor market get weaker to get rates down to that level.
From NAR: Total housing inventory registered at the end of June was 1.32 million units, up 3.1% from May and 23.4% from one year ago (1.07 million). Unsold inventory sits at a 4.1-month supply at the current sales pace, up from 3.7 months in May and 3.1 months in June 2023. The last time unsold inventory posted a four-month supply was May 2020 (4.5 months).
My affordability index model was created for 2020-2024 because this was such a unique period in U.S. history. Inventory had been slowly decreasing for many years before 2020, so there was a potential for unhealthy home-price growth. That’s exactly what happened.
My model was simple: we would be okay at 23% national home price growth over five years — 4.6% or less each year. Well, that didn’t work out, as the first two years combined saw 30% home-price growth. The second variable I added in 2020 was that housing would cool down if the 10-year yield could get above 1.94%, meaning 4% plus mortgage rates. That didn’t happen in 2020 or 2021 and home prices escalated out of control. My affordability metrics were destroyed and only after March of 2022 did the 10-year yield go over 1.94%, but that was well after home prices exploded higher. Naturally, housing was set to collapse in demand.
While inventory is far from normal levels, affordability is much worse now than in recent history, so pricing should cool down in the second half of the year, something I discussed in this podcast. So far, my 2024 price forecast has been wrong because home prices rose too much in the spring. The supply story is better this year, but if rates fall in the second half 2024, it would be more challenging to get the forecast right.
The existing home sales came in lower than anticipated today, but the positive story is that inventory is growing back to what I deem balanced. Inventory is very seasonal so we only have a few months more with the NAR data before it has its seasonal decline. However, for housing to ever be normal again, we need inventory to rise from the record lows and we are seeing that happen without a national housing bubble price crash.
