Why Home Prices Keep Rising Even as Inventory Recovers

Anyone out shopping for a home today knows that there are still precious few things for sale.

The housing market is just beginning to emerge from its weakest year in history. The inventory of new and existing homes is finally starting to rise, but there’s something strange about the numbers all of a sudden: The supply of newly built homes appears to be higher than it should be.

But these numbers are deceiving because of the unprecedented dynamics of today's housing market, which can be traced back two decades to another unprecedented period in housing history, the subprime mortgage boom.

All of this is precisely why housing prices continue to rise, and they usually fall when supply is high.

According to the National Association of Home Builders, there is currently a 4.4-month supply of new homes available for sale. A months supply is a common calculation used in the market to measure how long it would take to sell all available homes at the current sales pace. A six-month supply is considered a balanced market between buyers and sellers.

Supply was already low at the start of the decade, but pandemic-driven demand pushed it to a record low of just two months’ supply by the start of 2021. This shortage of homes for sale, combined with strong demand, has sent home prices more than 40% above pre-pandemic levels.

Now supply is finally picking up, but the gains have been mostly in the new-home market, not the existing one. In fact, there is now a nine-month supply of newly built homes for sale, roughly three times the supply of existing homes. New and existing home supply typically match in certain months. New homes now account for 30% of the total inventory, nearly double its historical share, according to the National Association of Home Builders.

“June 2022 marked the largest advance ever in new housing supply (9.9) over existing single-family housing supply (2.9),” wrote Robert Dietz, chief economist at the National Association of Home Builders. “This quarter illustrates that assessing current inventory on the market cannot simply examine existing or new housing stock in isolation.”

This unusual dynamic has been driven by recent volatility in mortgage rates and the unprecedented housing market disaster that began twenty years ago.

This housing market is unlike any other because of unparalleled economic forces. First, in 2005, we saw a massive surge in home sales, home construction, and home prices, driven by a sharp rise in subprime mortgages and a frenzy of trading in new financial products backed by these mortgages.

But all of this quickly unraveled, leading to one of the worst foreclosure crises since the Great Depression and the Great Recession that followed. Single-family housing starts fell from a high of 1.7 million units in 2005 to just 430,000 in 2011. By 2012, new homes accounted for just 6 percent of the total for-sale supply, and even by 2020, housing starts had yet to recover to their historical average of about 1.1 million units. They were down to 990,000 units.

Then came the Covid-19 pandemic, during which consumer demand surged and mortgage rates hit more than a dozen record lows, and builders responded. Housing starts surged to 1.1 million in 2021. The Federal Reserve was bailing out the economy, making homebuying much cheaper, and a new work-from-home culture was sending Americans on the move like never before. Suddenly, a tornado of demand was sucking up supply.

The current bizarre gap in supply between newly built and existing homes is also due to volatile mortgage rates, which fell to historic lows early in the pandemic and then surged to 20-year highs just two years later. Millions of borrowers refinanced their loans at rock bottom and now have no desire to move because they would have to trade a 3% or 4% rate on their loans to the current rate of around 7%. The impact of this lockdown has caused new listings to dry up.

It’s also put builders in the driver’s seat. Homebuilders had already ramped up production in the early years of the pandemic, with single-family home construction rising to more than 1.1 million in 2021, according to the U.S. Census, before falling back when mortgage rates rose. Builders have been able to buy into low mortgage rates to keep sales high, but as of May of this year, they were building at an annual rate of 992,000 units.

Resale listings improved slightly this spring as mortgage rates fell slightly, and by June, active listings were 16.5% higher than they were a year earlier, according to Redfin. Part of that increased supply, however, was due to listings staying on the market longer.

“The share of homes that have been on the market for at least one month has been increasing year-over-year since March, when new listing growth accelerated, but buyer demand has remained tepid, as it has been since mortgage rates began rising in 2022,” according to a Redfin report.

In the resale market, supply is lowest in the $100,000 to $500,000 price range, according to the National Association of Realtors. That’s where the bulk of today’s buyers are, and rising mortgage rates are pushing them to look for cheaper homes.

But interestingly, while supply is increasing in all price ranges, it is increasing most in the lowest price range, which simply means it is not enough. As fast as homes are coming to market, they are being sold under contract.

For example, there is only 2.7 months’ supply of homes for sale between $100,000 and $250,000, but that supply is up 19% from a year ago. Meanwhile, there is 4.2 months’ supply of homes priced over $1 million, but that supply is up just 5% from a year ago.

That explains why home prices remain stubbornly high, even as supply improves. Prices in May, the latest reading, were 4.9% higher than in May 2023, according to CoreLogic. Gains have started to narrow a bit, but not everywhere.

“Continuing strong home price gains this spring are continuing in markets where inventory is well below pre-pandemic levels, such as those in the Northeast,” said Selma Heap, chief economist at CoreLogic.

“Markets that are considered relatively more affordable, such as those in the Midwest, also saw healthy price growth this spring.”

Florida and Texas, which have seen relatively greater growth in the supply of homes for sale, are now seeing prices lower than they were a year ago, Heap notes.

Although analysts have predicted that prices and mortgage rates will fall in the second half of this year, it remains unclear whether prices will actually fall and whether the imbalance between supply and demand will allow prices to slow. If mortgage rates fall, demand will certainly rise, which will increase pressure on supply and keep prices high.

“Yes, inventory is building and will continue to build, especially as the impact of mortgage rate stabilization wanes in the coming quarters,” Dietz added. “But current inventory levels continue to support new construction and some price growth nationwide.”