The Big Story
When will inventory return to normal?
Quick Take:
- The median home price in the United States landed 4.3% below the all-time high reached in June 2022 after appreciating 9.7% in 2023. When accounting for current home prices and mortgage rates, the monthly cost of financing a home has never been higher.
- As expected, the Fed chose not to raise rates in June but will likely raise rates at least two more times this year. We continue to expect mortgage rates to remain between 6% and 7% for the rest of 2023.
- Broadly, housing inventory will likely remain historically low for at least three more years because of the high levels of sales and refinancing that occurred from June 2020 to June 2022.
Note: You can find the charts & graphs for the Big Story at the end of the following section.
Expect sustained mild sales and low inventory because of the 2020-2022 buying boom
The median home price in the United States increased by slightly over 50% in less than three years from 2020 to 2022, peaking in June 2022 — the largest and fastest price growth in history. The dramatic rise in prices primarily resulted from pandemic-related stimulus and lifestyle changes, which incentivized buying a home that was worth spending considerably more time in. All of a sudden, homes became more valuable for buyers, but due to record-low mortgage rates, they also became more attainable, which led to a buying boom that caused inventory to hit record lows in February 2022.
At the same time, homeowners perfectly content with the homes they had also wanted to take advantage of the low mortgage rates, causing refinancing to skyrocket. Refinance rates reached their highest in history in the fourth quarter of 2020. Refinancing remained high in 2021 but fell slowly throughout the year. Generally, it doesn’t make financial sense to refinance, only to sell your property soon thereafter, because of the costs of the refi (often 2-6% of the loan). Between home purchases and refinancing from June 2020 to June 2022, the U.S. has an outsized number of homeowners who were able to lock in a mortgage rate at or near the lowest rate in history. Because most people don’t buy and sell or refinance homes year after year, the current inventory level is reasonable, albeit challenging for buyers.
According to the National Association of Realtors (NAR), the median duration of homeownership in the United States was around 13 years in 2020. But let’s say, for the sake of example, we believe that number is no longer accurate, and it’s really more like five years. If five years is the median duration of homeownership, that means that pandemic-era buyers and refinancers likely won’t even start to consider reentering the housing market for at least another three years. It should be noted that five years is most likely generously low, particularly because the high mortgage rates (6.71% at the end of June) are disincentivizing homeowners who already have low rates from selling and buying a new home. As a result, low inventory is here to stay in most of the U.S., especially in highly developed areas where land for new housing is hard to come by. Additionally, mortgage rates will likely take three years to contract in a meaningful way as the Fed continues to raise rates in an effort to combat inflation.
During the Fed’s June meeting, board members decided unanimously to pause rate hikes but noted that at least two more would likely occur this year. Although headline inflation (Consumer Price Index, or CPI) is down by half since it hit 9% last June, core inflation, which removes volatile food and energy prices from the inflation calculation, has barely started to fall. Core inflation peaked in December 2022 and has contracted 9%. A large component to core inflation is shelter. The Consumer Price Index for Shelter is only down 2% from the March 2023 peak. This isn’t exactly surprising. If we compare the monthly cost of financing a median-priced home with the average 30-year mortgage in December 2021 versus June 2023, the monthly cost has increased 95%.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and the limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The Local Lowdown
Quick Take:
- Year to date, the median single-family home price increased 6%, while condo prices rose 24%. However, price per square foot shows that single-family homes and condos increased similarly, up 13% and 16%, respectively, in the first half of 2023.
- Active listings in San Francisco, which are only 3% above the two-year low, fell from May to June along with sales and new listings, highlighting the challenges of buying a home in a desirable market.
- Months of Supply Inventory has declined significantly in 2023, homes are selling more quickly, and sellers are receiving a greater percentage of asking price, all of which highlight an increasingly competitive environment for buyers.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
Low inventory, low sales, low new listings
unusual for housing, but typical in a classic supply/demand problem: as supply falls and demand remains steady or increases, prices rise, which is essentially what happened in San Francisco this year. However, housing typically works a little differently. In the first half of the year, new listings usually rise rapidly, far outpacing sales and causing inventory to rise from the winter lows. Demand also tends to rise in the first half of the year, and the increasing supply actually benefits the overall market because buyers can more easily find a home that suits their wants and needs. Finding the right home is far more valuable than feeling forced into a home that’s not right, so prices tend to rise in the first half of the year.
We don’t expect home prices to hit new peaks this year, and possibly not for the next two to three years. The supply problem in San Francisco shows no signs of waning, which creates the conditions for fewer sales and slower price growth.
Inventory fell further as sales outpaced new listings
Single-family home and condo inventory has been trending lower for the past 12 months, with condo inventory hitting a two-year low in June. Inventory showed some initial signs of growth in the first quarter before declining in the second quarter. Sales grew from January to May but fell in June, while new listings declined for the third month in a row. Additionally, inventory, sales, and new listings are all significantly lower than last year. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Even though new listings are at a depressed level, any amount of new listings positively affect sales. Potential sellers who have fully paid off their property are in a particularly good position if they don’t have to finance their next property after the sale of their home. Since January 2023, sales jumped 100% while new listings fell 41%.
As buyer competition has ramped up and sellers are gaining negotiating power, sellers are receiving more of their listed price. In January 2023, the average seller received 96% of list price compared to 102% of list in June. Inventory will almost certainly remain historically low for the year, and the market will remain competitive in the third quarter.
Months of Supply Inventory remained low in June
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). The San Francisco market tends to favor sellers, at least for single-family homes, which is reflected in its low MSI. However, we’ve seen over the past 12 months that this isn’t always the case. MSI indicated that single-family homes and condos began the year in a buyers’ market. MSI has declined sharply since January for both single-family homes and condos, indicating that the climate has shifted from a buyers’ market to a sellers’ market for single-family homes and a balanced market for condos. The sharp drop in MSI occurred due to the higher proportion of sales relative to active listings and less time on the market.
Local Lowdown Data
