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It’s easy for home prices to stay elevated when inventory is low. Read on to see why.
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There’s a reason 2023 has been such a difficult year to buy a home. For one thing, mortgage rates have remained stubbornly high. But home prices are also expensive, and that, combined with higher borrowing rates, has created an affordability crunch for many people.
So how is it that home prices have remained so high even with mortgage rates rising? You’d think that higher rates for mortgage loans would have pushed more buyers out of the market, thereby lessening the competition.
The reality is, that has happened. Buyer demand is not what it was in 2021, when mortgage rates wound up falling to record lows. And while it’s common to see multiple offers on a home these days, we’re past the point where bidding wars are pretty much a given.
Still, a big reason higher home prices have been sustainable is that housing inventory is markedly low. And until that changes, home prices are unlikely to drop to a notable degree.
The housing market needs more homes
As of the end of March, there was only a 2.6-month supply of available homes on the market, according to the National Association of Realtors. But it normally takes anywhere from a four- to six-month supply of homes for there to be enough listings to meet buyer demand in full.
As mentioned above, some buyers have pulled out of the housing market due to higher borrowing rates. But there are still enough people out there who want to buy homes. And those people have to compete with one another for the limited inventory that’s available. Because of this, sellers aren’t motivated to lower their prices all that much. Why should they be?
Let’s say that in a given neighborhood, there would normally be 12 mid-size homes for sale in May. If this year there’s only one home for sale in that neighborhood, its seller gets a lot more leeway.
This doesn’t mean that the seller can command a ridiculously high price for their home, because buyers might say no to that. But that same seller might also list at a higher price than usual, knowing full well that if a buyer wants a home in that neighborhood, theirs is the only option.
And this is the reason we’re stuck in a holding pattern of higher home prices. Until real estate inventory increases, higher prices will likely be here to stay.
When will housing inventory pick up?
Housing inventory is likely to remain sluggish until mortgage rates drop. Many of today’s homeowners have lower interest rates on their mortgages because they either signed them at a time when rates weren’t as high as they are today, or they refinanced in 2020 or 2021 when rates plunged. So a lot of people are now, understandably, hesitant to sell their homes only to have to borrow at a higher rate for a new one.
Of course, we don’t know when mortgage rates will start to come down, and that may not happen anytime soon. This means that higher home prices may be here to stay a while, and that the much-anticipated cooling of the housing market is probably a ways off.
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