When will it pop? | Housing Inventory Levels Rising

June 14, 2022

When will it pop? | Housing Inventory Levels Rising

We're hearing a lot about the housing crash, the housing bubble, interest rates, inventory, demand, and so on. So let's talk about it.

Let's start with interest rates. That's what's causing the market to slow down a bit, making it (hopefully) less competitive for some buyers in some areas.

Also, I'm about to show you some fantastic articles about what's going on in terms of demand and inventory. That way, we'll be able to see how much inventory there is and what challenges we're up against in the housing market.

Ready to dive into it? 

Inventory Update: Slowly rising, but still significantly low

Fortune released an article about the local housing market cooldown amid the “Great Deceleration.” 

One of the factors contributing to the slowdown is interest rates. Inventory levels are the other consideration.

“For me, the best part of the housing story in 2022 is the rise of inventory, as this will put home sellers and builders in check. They had too much pricing power and they pushed prices way too high, says Logan Mohtashami, lead analyst at HousingWire. (Source: Fortune)

We’ve seen what happened with home builders just over the last month with the report that came out a few weeks ago. All of a sudden, the new construction inventory shot up to a nine-month supply when the average is six months.

But according to Fortune, “Homebuyers shouldn’t get too excited—yet.”

“While inventory levels are rising fast percentage-wise, they're still far below pre-pandemic levels. Look no further than Coeur d’Alene, which saw inventory spike 54% between late March and early May as it went from 242 to 373 active listings,” Fortune says.

That’s a big jump in inventory for a span of two months, and the interest rate is [most probably] the culprit.

But, here’s the key: According to Fortune, “However, that's still 62% below the 980 listings it had the first week of May 2019. Simply put: Even if the Great Deceleration picks up steam, it will take time before we’re back to a pre-pandemic housing market.”

This is happening in different parts of the country, and keep in mind that real estate is very regional. As a result, what may be happening in one location may not necessarily be the case in others. The same thing is true for new construction inventory.

And, yes, having a nine-month supply of new construction [houses] is going to hurt the market in those areas that do have an oversupply (for the existing demand), but not for those areas that still have a low supply of inventory. This is why it’s regional. New home construction varies across different housing markets across the US.

There’s also a statistic from Altos Research that says even though inventory is rising, it is still significantly low.

It is important to dig into this stuff so we can avoid being misinformed by claims of a housing crash or bubble.

“The housing market is still savagely unhealthy because [of low] total inventory levels in America,” Mohtashami says. In order for us to return to a "normal" housing market, his economic models show we need to see national inventory rise to a range between 1.52 million to 1.93 million units. The National Association of Realtors’ latest reading has inventory at just 1.03 million units. (Source: Fortune)

If interest rates go back down for any reason—let’s say, for example, if by the end of the year the Fed says they’ve got a handle on inflation and interest rates start dropping and mortgage rates also go down, we will have an inventory challenge.

Check out the interactive map in this article and you’ll see the shift in inventory levels over the past three years (from pre-pandemic May 2019 to May 2022). You’ll see that almost all (with a few areas here and there as an exception) have more or less a 50% drop in inventory level.

Also, according to Altos Research, available inventory for single-family homes in active listings (not new construction) is up 3% from Memorial Day (375,299 homes). And remember, during these months (May to July), during summer markets, everyone puts their homes on the market.

But despite that increase in inventory, we are still far below the available inventory from 2015 to 2020.

So, we have a long way to go in terms of actual inventory—and that is a story that nobody’s talking about amid this housing crash discourse.

Market Shift

For the past two years, real estate has been a seller’s market. Because there is little supply, and the demand is high, pricing control leans towards sellers’ favor. But now, the market is shifting, albeit a little slower, in favor of the homebuyers as inventory starts growing.

Redfin lists the leading indicators we have to watch out for.

(Source: Redfin)

Note that the mortgage rates have dropped slightly, so for those of you who are afraid that the mortgage rates might increase as the Fed continues to meet, it might not necessarily be the case. Unless something drastic happens and the Fed surprises us with around a 0.75% increase in rates.

But, if everything remains well with the Fed and we gain some type of hold over inflation over the next eight months or so, rates are not going to go up that much and most probably will remain in the 5% range.