Unprecedented Housing Market Conditions
The current housing market is experiencing unique economic forces, including the foreclosure crisis, the Great Recession, the pandemic, and rapid changes in mortgage rates. These factors have created a market unlike any other.
Supply Dynamics
Increase in New Homes
The supply of homes for sale, both newly built and existing, has finally started to increase. However, the increase is primarily in newly built homes. The months’ supply of new homes for sale is now almost three times that of existing homes.
Supply of Existing Homes
The supply of existing homes remains low because many homeowners who might want to move up are staying put due to high mortgage rates. This has further tightened the supply of existing homes on the market.
Demand and Pricing
High Demand for Affordable Homes
There is a significant demand for homes in the $100,000 to $500,000 price range, which has the lowest months’ supply despite the increase in overall supply. Homes in this price tier are being bought quickly, contributing to rising prices.
Impact of Mortgage Rates
Roller coaster mortgage rates have made it difficult for buyers and sellers alike. Homeowners with low mortgage rates are reluctant to sell and take on higher rates, which limits the supply of existing homes on the market.
Home Builders’ Position
Entry-Level Home Builders
Home builders like D.R. Horton and K.B. Home, which focus on entry-level homes, are seeing the most demand. These builders are better positioned in the current market due to their focus on more affordable housing.
Control Over Supply
Home builders have significant control over their inventory. The reported supply includes homes that have been permitted, are under construction, or are finished. Builders can adjust their output based on market conditions to avoid a glut of homes.
Potential Market Shifts
Pent-Up Seller Demand
There is a lot of pent-up seller demand, particularly among aging baby boomers who would like to downsize but are hesitant due to high mortgage rates. If mortgage rates come down to around 6%, it could encourage more sellers to enter the market.
Market Outlook
If mortgage rates decrease, it is expected that more homeowners will decide to sell, potentially easing the supply constraints and affecting home prices. However, the overall market conditions will continue to influence both supply and demand dynamics.
Conclusion
The current rise in housing prices, despite an increase in supply, is driven by a combination of high demand for affordable homes, limited supply of existing homes, and fluctuating mortgage rates. Entry-level home builders are best positioned to meet the ongoing demand.
