A Comprehensive Analysis of the Housing Market’s “Inventory Crunch”

As we reflect on the recent summer home shopping season, it becomes apparent that something unusual was afoot. The primary culprit behind this unusual calmness in the real estate sector can be attributed to the meteoric rise in mortgage rates, a situation that reached its zenith in mid-August, with rates currently maintaining their highest level in two decades. This unexpected turn of events has thrown both homebuyers and sellers into a state of inertia, giving rise to what economists are now terming an “inventory crunch,” as outlined in a recent Realtor.com® report.

During August, the number of homes available for sale witnessed a staggering 7.9% decline compared to the same period in the previous year. This decline becomes even more striking when we juxtapose it with the pre-pandemic period of 2017–19, which boasted nearly double the number of homes available for sale in comparison to our present circumstances.

Remarkably, this dwindling inventory is impacting both sides of the real estate bargaining table. For prospective homebuyers, the ascent of mortgage rates has pushed monthly housing costs beyond the reach of many, rendering the dream of homeownership increasingly elusive. On the flip side, homeowners with existing mortgages at significantly lower rates are understandably reluctant to relinquish their favorable terms.

Realtor.com® Chief Economist Danielle Hale eloquently summarizes this dilemma, stating, “This differential has led a lot of homeowners to choose to stay in their homes instead of selling and moving, and is a key contributor to low housing inventory.”

How do mortgage rates affect inventory?

Interestingly, the effect of rising mortgage rates on inventory isn’t straightforward. As Hale points out, “The number of homes available for sale had climbed in late 2022 and early 2023 as mortgage rates climbed.” However, this upward trend eventually encountered a threshold and has recently “lost momentum.” Given the Federal Reserve’s indication of potential benchmark interest rate increases before year-end, concerns linger regarding the possibility of further mortgage rate hikes.

Will home prices cool off come this fall?

So, will home prices experience a cool-down in the fall? The housing shortage persists despite a slight cooling of median home prices from July’s $440,000 to $435,000 in August, although they still register a 0.7% increase compared to the previous year. However, the odds are that prices will remain inflated until a more substantial inventory increase rectifies the supply-demand imbalance. As Hale explains, “Listing prices have been buoyed by scarce inventory.”

To mitigate the dearth of existing home sales, some buyers have shifted their attention toward new construction. Nevertheless, Hale rightly points out, “While new-home sales have been increasing, construction activity isn’t elevated enough to fully bridge the low inventory gap.”

An ‘uptick’ in new listingson the market

Amid this relatively gloomy scenario, there is a glimmer of hope. Seller activity, though limited, shows signs of life. From July to August, there was a modest uptick of 3.5% in the number of newly listed homes. As Hale observes, this late-summer increase in newly listed homes is somewhat unusual from a seasonal perspective. While inventory remains constrained, the “unusual uptick in newly listed homes” in August holds promise of a resurgence in seller activity as we head into the fall season—an optimal time for homebuyers.

However, many homeowners opting to sell their properties do not appear inclined to offer substantial concessions to buyers. Clint LaCour, an agent and principal at LaCour Properties in New Orleans, sheds light on this perspective, noting, “Sellers believe that low inventory suggests they can command higher prices. However, with interest rates at their highest level in many years, buyers are adopting a cautious stance and will only proceed with a purchase if the property is reasonably priced.”

Where are the number of listings growing?

Despite the prevailing listing drought in most metropolitan areas, several Southern cities are experiencing a notable surge in listings compared to the previous year. Cities such as Memphis, TN (+30.7%), New Orleans (+29.2%), and San Antonio, TX (+18.4%) have witnessed a robust uptick in available listings.

Meanwhile, the pace of sales continues to slow down. Nationally, typical homes spent 46 days on the market in August, which marks an increase of five days compared to the previous year. Nevertheless, this duration remains shorter than pre-pandemic levels.

LaCour notes that buyers are becoming more discerning, taking their time in the selection process. As he aptly puts it, “Houses priced correctly are selling. Properties that linger on the market are typically overpriced, present condition issues, or are located unfavorably—or sometimes, a combination of all three.”

As we approach the autumn season, it appears unlikely that a sudden inventory surge is on the horizon. Danielle Hale aptly summarizes the situation, stating, “With many existing-home sellers opting to stay put due to the continued rise in mortgage rates, I foresee this dynamic remaining unchanged in the coming months.”

Real estate pro Brian Chandler of RE/MAX Alliance Group is a top producer and sales trainer, with over 45 years of experience, located in the Denver Metro Colorado, area. Whether you’re buying or selling, team up with Brian today! 720.808.1007 Read more articles like these Top Realtor Info Contact Brian Chandler