US Housing Market: Number of Home Sales down 40%

According to recent statistics, the number of homes for sale in the US fell by 6% from a year ago in the four weeks that ended on June 11, 2023.

The US Federal Reserve has opted to keep interest rates unchanged, but they have expressed concerns about two more hikes later this year. The increasing investor concerns are causing tensions to hover over the US housing market, which is the world's number one economy. The housing market crisis is having a negative effect on home sales across the country, mainly due to the growing shortage of homes for sale in the market.

According to recent statistics, the number of homes for sale in the US fell by 6% from a year ago in the four weeks that ended on June 11, 2023. This is the biggest decline in 13 months. At the same time, the number of new homes plunged by 23%, continuing a 10-month streak of double-digit declines. All these dips are adding to the shortage of homes for sale after the pandemic. Indeed, the current supply is 39% less compared to five years ago, which is in June 2018.

There are several reasons why we are experiencing this current situation in the housing market. One of them is that homeowners are continuing to enjoy low interest rates when buying previously owned homes. They are afraid of not being able to find a suitable new home when the supply is too low. This trend could continue, especially as the latest warning from the Federal Reserve suggests more rate hikes until the end of the year.

Other factors contributing to this supply crisis include the significantly decreased home construction activity in the US over the last decade, mortgage rates falling to record lows during the pandemic, and then suddenly skyrocketing. Mortgage rates have more than doubled since 2021, hitting nearly 7% in the second week of this month. The record-low mortgage rates in 2020 and 2021 ignited a boom in housing transactions, leading to a dwindling supply. When interest rates began to rise again in early 2022, many home sellers withdrew from the market, leaving the supply gap to be impossible to fill.

Furthermore, pending home sales fell by 17% year over year – the biggest drop in more than four months, but not due to a lack of demand. People are still interested in buying homes since mortgage applications rose 8% in the first week of June. Moreover, the real estate firm, Redfin's Home Demand Index, rose throughout the first half of this month to near a one-year high. This points to a pent-up demand for homes, and many prospects are ready to take advantage of the situation as soon as more homes hit the market.

However, the demand outstripping the supply is also preventing house prices from plummeting. Although the average selling price has fallen by just 1.1%, it is still the smallest annual decline in the past three months.

The Fed's signal that interest rates could rise between now and the end of the year means new home sales will remain low, and inventory shortages will worsen. As such, economists have forecasted that housing prices in the US will see a correction in the second half of the year.

According to a January report by British research firm Capital Economics, "demand in the US housing market has bottomed out after a mortgage rate hike in 2022. However, home prices are yet to come bottom and will drop at most 8% from the peak." Soon after this report was released, the housing indexes began to recover in spring trading. After falling for seven consecutive months from July 2022 to January 2023, house prices, as measured by the seasonally adjusted Case-Shiller National Home Price Index, increased in February and March.

Going into June, Capital Economics updated its report, arguing that after the housing market rebound in the spring of 2023, house prices in the second half of the year would correct back down. Their report reads, "Home prices were driven by a temporary surge in demand at the start of the year due to falling mortgage rates. Since then, interest rates have returned close to two-decade highs set in October 2022, dragging demand down to a near 30-year low. With the economy weakening, we expect sales to remain low and prices to fall between now and the end of the year."

Most companies in the industry continue to forecast house price declines in 2023, except for CoreLogic and Zillow. The main reason is the lack of affordability in housing, which has reached tense levels similar to those seen since the housing bubble burst 15 years ago. However, price reductions will, of course, be uneven across regions.

At the Federal Open Market Committee meeting in June, the Fed decided not to raise interest rates. However, Chairman Jerome Powell signaled the possibility of an increase in the operating rate by a total of 0.5 percentage points between now and the year-end. He also mentioned the so-called "bottom" in the housing sector, although he did not specify whether it concerned the housing market's performance or house prices. He said he does not expect to see housing prices increase rapidly. Instead, prices will likely "wander to the lows."

With the interest rates remaining steady for the time being, this could be good news for those looking for a new home, especially first-time homebuyers who can take advantage of lower interest rates with mortgage loans.

The US housing market is experiencing a shortage of supply, leading to soaring home prices. The demand outstrips the supply, which is preventing house prices from plummeting. Although the Federal Reserve has opted to keep interest rates unchanged, they have warned investors of two more hikes later this year. This signals that new home sales may remain low and inventory shortages may worsen. Nonetheless, there is a pent-up demand for homes, and many prospects are ready to take advantage of the situation as soon as more homes hit the market.