The housing market is in trouble. fresh blow going Mortgage rates returning to 7%,
But an ongoing problem has been a severe shortage of inventory, which is very different from conditions at the time of the Great Recession.
And the higher mortgage rates get, the worse the inventory situation gets. This is because existing landlords are discouraged to sell and lose their low rates.
At last glance, 84% of all outstanding mortgages had mortgage rates of 5% or less according to 2022 HMDA data.
and 63% had a rate of 4% or less. Simply put, these homeowners don’t want to give up their low rate and want to replace it with a new 30-year rate closer to 7%.
Housing market is hurting due to lack of inventory
As mentioned, the current state of the housing market is Very different from what we saw in 2008,
At the time, there were too many existing homes on the market. And countless new housing developments are littering the country.
In fact, there were so many homes that many projects stalled before completion.
I distinctly remember driving to the outskirts of Los Angeles and Phoenix documenting a number of new subdivisions that were desperately trying to offload inventory.
There were so many vacant homes that it seemed almost impossible for them to ever sell.
Meanwhile, disgruntled owners who were often the only ones living on a particular street posted warnings to buyers.
One owner literally posted a sign on his yard that said “DO NOT BUY HOMES HERE!”
He felt remorse and felt that he had been wronged. And they didn’t want others to fall into the trap of buying a house in the middle of nowhere at a high price.
But that was then and this is now. Today, potential buyers are hard-pressed to find a home.
Sure, the current inventory is ticking over a bit, and builders have a glut of supply. But nothing is as it was.
Housing inventory is up, but remains minimal
National Association of Realtors Free Its existing home sales report for January earlier this week.
He noted that sales fell for the 12th consecutive month to a seasonally adjusted annual rate of four million.
Sales of existing homes were down 0.7% from December 2022 and 36.9% from the same time a year ago.
Meanwhile, the median current home sale price actually rose 1.3% from a year earlier to $359,000.
But here’s the most interesting part — the inventory of existing unsold homes at the end of January stood at 980,000, or the equivalent of 2.9 months’ supply at the current sales pace.
To put this in perspective, in early 2009 the housing inventory was at 9.6 Months Supplyper NAR.
There were 3.6 million unsold homes, which was actually an improvement from 4.5 million a year earlier.
Today, there are less than a million, despite a 15.3% increase from the year before (850,000).
The double-edged sword of low mortgage rates
while low mortgage rates What were a boon for homeowners over the past decade are now coming back to bite.
first american economist to quote as “golden shackles” for them because of the associated rate lock-in effect.
They restrict movement for existing home owners, and at the same time restrict potential home buyers as well.
And the higher rates go, the worse it gets. As the spread widens, existing owners have less incentive to sell.
This reduces the supply, which causes asset values to rise. But the combination of the high asking price and 7% mortgage rate doesn’t work for most.
While this may prove to be temporary, if mortgage rates eventually return to 5%, what do buyers do in the meantime?
Can Free and Clear Homeowners Improve Inventory Positions?
One place to look can be free and clear homeowners who have nothing as a mortgage,
Per First American, by 2021 nearly 42% of US homeowners will not have a home loan. Thus, they are unaffected by mortgage rate lock-in.
And about 78% of these free and clear owners were 55 or older. so if they do move, there’s a good chance they’ll downsize and buy with cash (using the sales proceeds).
This means that current mortgage rates are not a factor for them. The only issue is that many Baby Boomers are aging out, aka not going away.
So banking on rectifying the housing inventory problem may be a shot in the dark.
the takeaway is There are very few existing homes on the marketAnd the higher the mortgage rates, the worse it is.
It also explains why home prices are holding up well despite pulling back from their ridiculous post-COVID highs.
and why that 2008-esque housing market crash May prove elusive.