Article from INMAN
Even with rising rates, record high prices and an increase in new home construction, the seller’s market isn’t set to end soon, economists and housing experts told Inman.
Rates are rising, inventory remains historically low and prices are sky high. Is a buyer’s market on the horizon?
Even as forecasters predict an uptick in homes hitting the market early this year, the most homes under construction since before the Great Recession, and more buyers to be priced out due to already high prices and rising mortgage rates, economists told Inman they don’t foresee a return to what has traditionally been known as a buyer’s market any time soon.
Sellers remain in the driver’s seat, and economists told Inman the country still has a long way to go to settle into potentially new ways of thinking about just what is a normal housing market in the modern age.
“My personal view is that a couple things will be different going forward,” said Doug Duncan, chief economist at Fannie Mae.
What is a balanced market anymore?
The traditional view is that a market is in balance when there’s six months’ supply of inventory in a given area, meaning it would take six months to sell out of all currently available inventory.
Many places in the U.S. haven’t seen that type of balance since around 2013. There is no indication that we’re close to returning to that level anytime soon.
“In current markets across the country, particularly the hot ones, you’re looking at about one to maybe two months worth of inventory,” said Selma Hepp, deputy chief economist at CoreLogic. “I just have a hard time imagining that we would ever get back to six months supply again any time soon.”
Changes in technology will forever mean homes sell quicker, Duncan said. Whereas buyers had previously spent time traveling to physical locations to view homes they were interested in, they can now view dozens without leaving home. Even the processes involved in finalizing transactions have moved online to speed up the process.
“The rule of thumb of the past was that six months’ supply is equal bargaining power between buyers and sellers,” Duncan said. “That might be too high. It might be four, four and a half months.”
Can inventory catch up?
After the Great Recession, construction of new homes slowed, resulting in a shortage of about 1.35 million new homes in the biggest markets over the past 15 years, according to Zillow.
That’s as if no new homes were built for almost three years, the company said.
So while December 2021 saw more new homes hit the market than at any other time, the country is working its way through a supply backlog that is helping to keep sellers in control.
“If you look at demographics, you can say that the current level of construction is pretty close to normal,” Duncan said. “But what that doesn’t tell you is how much behind that total supply is.”
Home builders last year reached a level they hadn’t since 2006. Last month, one in three homes on the market was a new-build, according to a study by online brokerage Redfin.
But the size of the backlog and the time it will take for those homes will take time to hit the market means many markets still have a long way to go.
“It’s still going to take a really, really long time to make up for the last 15 years of a lack of supply coming in,” Bachaud added.
Rates are rising, will buyers get the edge?
Even after beginning to climb late last year, mortgage rates remain low compared to longer term trends. Higher rates won’t necessarily mean people will stop buying homes, economists said.
Duncan said that just 10 years ago, if you were to tell a prospective buyer that the interest rate would hit 3.5 percent, they’d line up to lock in.
“Where can I get one of those?” Duncan said, referring to what would have been considered a low rate in 2012.
But a year ago rates were closer to 2.5 percent, Duncan said, “And people go, ‘What happened?’”
Even when rates climbed above 18 percent in the early 1980s, people continued buying homes.
“Interest rates rising is going to probably pull some people on the margins away from buying at this time,” Bachaud said. “That might have some impact, especially in really expensive markets.”
“Historically, interest rates were in double digits before and people still bought houses then,” she added. “Generational demographics are still going to be at play. Millennials are a huge generation and they’re still going to be trying to buy homes in a few years from now.”
Millennials have recently overtaken baby boomers as the largest cohort of real estate buyers. And as they’re new in the market, their force will continue to put pressure on home supply.
The takeaway? More of much the same
Some forecasters expected improvements in inventory early this year. That might not be happening.
“Acceleration of home price appreciation has gone up [and] inventory has continued to drop pretty drastically,” Bachaud said. “So it’s a lot tighter and more competitive at this time of year than we were expecting.”
Predicting an end to the ongoing seller’s market may be a lost cause.
“I’m just thinking about in which situation would I feel there’s a favorable buyer’s situation,” Hepp said, “I just can’t even imagine at this point when and where that’s going to be.”
The bottom line, for now?
“It’s still a seller’s market,” Duncan said. “The public recognizes that.”