Mortgage rates decided to bounce back into the 7s this week. We can see an impact in that immediately as home sales are slowing down. These are the homes that go into contract immediately after listing. We also see new pending sales slowing and price reductions ticking up.
The most notable thing in the data this week is that, while home prices nationally are still holding a few percentage points higher than last year, home prices have started to decline in a few states — Florida, Arizona and Texas.
Inventory continues to build
There are now 605,000 single-family homes on the market. Inventory continues to build each week as mortgage rates stay over 7%. Inventory rose by 1.7% this week, and there are now 39% more homes (170,000) on the market than last year at this time. That’s a pretty big increase.
A couple of key facts about the inventory increase:
- Inventory is climbing everywhere, every state has more homes for sale now than a year ago. Most of the country has over 30% more homes on the market now.
- A few states — Texas, California, Florida, Georgia, and Arizona — are driving the bulk of the inventory increase for the country.
Higher interest rates that lead to greater inventory. Last fall, we all assumed that mortgage rates would be declining by now. Had that happened, inventory would be down again. I don’t predict mortgage rates, but this trend of rising inventory will continue as long as rates stay elevated. That means that, by next summer, if mortgage rates are still in the 7s or higher, we could finally be back at the old normal levels of unsold homes on the market.
New listings dry up
On the other hand, inventory can’t build too much if sellers don’t sell. There are some signals of seller volume drying up. There were only 63,000 new listings this week. That’s down 12% on the week, which included the Memorial Day holiday. Every year, has a dip in activity for the holiday. But I think it’s notable that the holiday week dipped lower than any year except last year. Seller volume in 2024 had been slowly growing, and I viewed that as an optimistic trend. But that seller pace seems like it has lost momentum.
Only 17% of the new listings went immediately into contract this week. Of the 76,000 new listings, 13,000 are already in contract. That rate has been dropping all month. 17% is significantly fewer than last year at this time or even 2022 when the market was changing so dramatically. Overall, there are 10% more total sellers than in 2023 at this time.
We will have big inventory gains for the next four weeks, then a breather for Independence Day, then another bump in July before tapering off in the late summer. We’re currently modeling inventory to peak in October and that model is very interest rate sensitive. If rates are climbing late in the year, inventory will climb too. If rates fall before then, inventory will turn down earlier in the summer too.
We’re currently expecting to end the year about 625,000 single-family homes on the market which would be 19% more than a year ago.
Pending sales
There are 406,000 single-family homes in contract, just 1% more than a year ago. There were just 63,000 new contracts pending for the holiday week. Any of the growth in home sales feels like it has evaporated. Also, the pending sales count will typically start declining in mid-June, as the market shifts from the spring season to the summer. So, we’re probably at the peak of the sales now.
The pending sales have lost any momentum they had this spring. The sales pace will pick up if rates happen to drop notably in the quarter. Though it’s impossible to know if rates will climb or fall in the next few months. So we’ll just keep our eyes on the pending sales data to watch the impact.
Prices tick down from last week
The median price of all the single-family homes available in the U.S. is now $453,500. That ticked down from last week and is not even 1% above last year or even two years ago. Annualized home price gains have come down from where 2023 ended.
The headlines tend to focus on sales prices and the earliest proxy for sales happens with the contracts pending. To be clear, the weekly price measure for the newly pending properties across the country is still coming in about 5% greater than last year. This price measure stands currently at $399,000, and has been bouncing 3-5% above last year. Since the leading indicators of home prices have been softening for a while now, we expect to see this proxy for sales prices to recede lower soon.
In fact, when we look at the state level, Florida and Arizona pending sales prices are down from April. These are the first two states to turn lower this year. Texas is probably at that point as well and parts of the state, like Austin, home prices are still plenty below the 2022 peak.
At Altos, we don’t seasonally adjust the data. It’s notable that these markets have ticked down in the second quarter, when home prices normally rise.
When looking at national prices, since supply is greater everywhere and since the other leading indicators of sales prices are softer, we expect the national price indicators to ease lower too in the coming months.
Price reductions rise
This week, 35.1% of the homes on the market have reduced their asking prices. That’s 30 basis points more than a week ago and a pretty sizable jump over a year ago. As a rule of thumb, it’s “normal” for about a third of homes to take a price cut before they sell. Sometimes it’s intentional, sometimes not, but about a third are over-priced at listing and then take a price cut before they sell. As home sellers are faced with less demand than they expected, more of them have to reduce their prices.
Price reductions now are reaching the upper 30s nationally. This is a bearish indicator for future sales prices.
There are some parts of the country, New England in particular, with still pretty tight inventory and still relatively few price cuts. Supply is balanced with the current levels of demand in some regions. So that may keep a lid on this stat when we look at the national levels.
Homebuyers are obviously sensitive to the cost of money, and mortgage rates stayed higher for longer than anyone anticipated this year. They haven’t come down yet. What if they do? If you aren’t watching the data each week, you’re probably behind the curve. You have buyers and sellers who have no idea how this market is changing right now.
Mike Simonsen is the founder of Altos Research.
