Mortgage rates fell two weeks ago and then climbed steadily again last week. Will this be enough to spur any new seller activity, or will we look forward to 2025 when home sales finally resume?
From a total inventory perspective, there hasn’t been any pickup in demand over the past few weeks as mortgage rates have fallen below 7%. This surprised me a bit. I expect to be able to gauge the pick-up in demand with cheaper funding. There are two factors at play here.
1) It could be that interest rates haven’t fallen far enough, or haven’t stayed at that level long enough. I expect below 6.75 to 6.5 to be the threshold for buyers to start taking action. We hit 6.5 10 days ago. But rates were short-lived and have been climbing higher over the last week. As a home buyer, I had to adapt to interest rates and buying options to make that quick jump. Frankly, most buyers are not that aware. Rising interest rates can stop me pretty quickly, but falling rates take longer to motivate me to take action.
2) Another reason why we don’t measure demand pick-up at lower rates is seasonal timing. In order to incentivize buyers to take action through falling interest rates, we need buyers to actively shop. We may see homebuyers pull out entirely in 2024, waiting to find out where interest rates are, the state of the economy, and who the president will be next spring. If I were a home buyer, I wouldn’t see many market trends that would make me want to jump ship immediately.
For whatever reason, we have not yet measured demand growth in a depressed housing market in 2024.
stock
There are currently 693,000 single-family homes on the market. The increase for the week was 1.3%, slightly higher than the increase estimated by the week-by-week seasonal model. There are now nearly 41% more homes on the market than last year. At the end of August last year, rising mortgage interest rates caused a slowdown in homebuying and inventory growth was unusually rapid. As of the end of October, last year’s inventories were increasing by 1-2% each week.
We have not yet reached the peak of this year’s inventory. Unsold homes on the market rose 1.3% weekly, but the trend has yet to stabilize. From a supply perspective, there hasn’t been any pickup in demand over the past few weeks, with mortgage rates below 7%. As I mentioned, this surprised me. I expect demand to pick up as money becomes cheaper. Since we haven’t seen inventory plateau yet, that means homebuyers need to keep an eye on changes in mortgage rates. Homes and payments are still very expensive, and it’s the end of the season.
Therefore, the next signal we will be looking for is whether weekly inventory changes have leveled off – from a weekly increase of 1.3% to below 1% to flat. If mortgage rates don’t rise, I expect mortgage rates to rise significantly next month. Assume that despite inventory declines, unsold inventory continues to increase. In this case this would cause me to go back to the predictive model and recalibrate. So keep an eye on stock over the next six weeks or so.
Homes for sale
Speaking of recalibration, we did a big upgrade to the database code last week and some calculations are still being processed, so we won’t be releasing new inventory data this week. Everything should be back to normal on that front next week.
Currently, 367,000 single-family homes are under contract and an additional 77,000 apartment units are under contract. The current number of pending cases is 3% lower than a week ago and the same as last year. When we look at sales rates, it’s normal for the sales pace to decline in the second half of the year after peaking in June.
During the first half of this year, I had been expecting modest growth in 2023, but that has yet to materialize. The sales target for this year is just over 4,000,000 units. That number has not grown and is down slightly from earlier this year. In this chart, the dark line for 2024 tracks last year’s red line. Maybe by 2025 we will finally see some growth in home sales. But it still needs to be added to the data.
house price
As a result, sales will decline in 2024 with no signs of improvement. If supply increases and demand decreases, does that mean prices will fall?
You might think so, but they’re not. At least, the national average home price is not falling. In fact, home prices in many markets are indeed lower now than they were a year ago. In many places, home prices are rising. Nationally, home prices are up about 3% from a year ago. Looking at prices for new listing groups each week can help us understand what’s going on.
Since 2022, house prices have barely changed over the past three years.
During the pandemic, the median home price climbed from $300,000 to $350,000 to $400,000. At the bottom of the chart, in 2018-2019, rising mortgage rates and Trump’s trade war did cause the economy to slow. From 2019 to 2020, house price growth stagnated.
I like to use the price view of new listings of similar products each week as a leading indicator of future sales prices. The house is listed now, stays on the market for a month, offers are accepted, a contract is signed, and the sale closes within the next month. When sellers have buyers, they list items at a slightly higher price. So, we can see a quick response to price changes.
The median price of new homes listed this week was $410,000. That’s down from last week and just 2.8% higher than the same time last year. Sellers’ asking prices have what’s called “downside stickiness.” Home sellers don’t really want to list fewer homes than their neighbors, so we won’t see a significant drop in home prices even if demand is weak.
This helps us predict how house prices will change over the next few years. For two full years, house prices were essentially flat, but while total transaction volume plummeted, prices did not plummet. I can imagine that in a few more years, house prices barely change while incomes improve, perhaps in the future interest rates will drop again, so affordability will eventually return.
sales price
When we look at homes with offers accepted and under contract this week, we can see that the national median price is $389,900. That’s down nearly 1% this week but up about 4% from a year ago. As a result, prices for new listings increased by 3% and prices for new sales contracts increased by approximately 4%. This year’s turnover will be within this range.
Sales prices in the second half of the year dropped slightly with the seasons. When we look at the group of homes accepting offers and going under contract each week, the dark line is still higher this year than last year.
People ask me how the Altos home price measure differs from other measures such as the Case-Shiller Index. One difference is that Altos measures the housing market. Case Shiller is what’s called a repeat sales index, and they try to look at the price of the same house over time. How much has the price of a particular house changed? In Altos’ data, if I walked into the market today, this is what I could buy. This is the price people pay for their homes. Altos focuses on “How much does a home cost?” The Repeat Sales Index looks at “How much has the value of a home changed over time?” Of course, they are closely related. As demand increases, market prices rise and repeat sales values rise. But if you’re buying or selling a home, I suggest the numbers you care about are market numbers. “What is available today? How is the market changing? Can I afford it now?
Even though home sales are not increasing, as I mentioned, our 2024 sales are expected to be 4 million units, buyers know where the prices are. Approximately $390,000 is the buying box for today’s American consumer. That’s up only a fraction from a year ago, with no signs of a big jump this year. If mortgage rates rise again (such as in a severe economic downturn), they could fall quickly.
price reduction
We are approaching the end of the season. Home prices on the market are at a fairly stable level. The proportion of homes on the market with price reductions increased slightly this week, but the pace of price reductions is no longer particularly rapid.
About 39.7% of the houses on the market have experienced price reductions based on the original list price. An increase of about 30 basis points from last week. You can see in the coming weeks how the slope of this year’s price cuts (i.e. the dark line) will take us below a sharply slowing market in 2022.
The price reduction data is consistent with other supply, demand and pricing indicators we shared today. None of this will result in us gaining any price advantage in the market. But nothing breaks down either.
I’m using 35% as a “normal” rule of thumb here. In all markets, some sellers overprice and cut prices. It typically accounts for about one-third of the market, but varies by location. For example, Phoenix is usually around 40%, while the Bay Area has chronically tight inventory, which means only about 20-25% is typically needed for price reduction. Across the country, more sellers than usual are having to lower their asking prices. This should come as no surprise. What we are concerned about now is, if buyers remain silent for the rest of the year, will the “downside stickiness” of seller pricing start to become less sticky? That said, will sellers end up frustrated by the lack of offers and take advantage of discounts to move on? We haven’t seen any evidence yet. Since most homeowners have substantial equity and good financing, you can imagine these sellers don’t need to rush.
That’s why we do data work like this every week. If sellers end up changing their expectations, we’ll see it in the data soon. Mortgage rates will remain higher this year for longer than anyone expected. Maybe we’ve finally turned a corner? And if we’re lucky? For buyers and sellers, these conditions can change quickly.
Founder of Mike Simonsen altos research corp..
Screenplay by Mike Simonson
