Inventory is going to be key slowing price growth in the housing market. Here's one indicator to keep an eye on heading into peak season.
The end of February typically marks the beginning of spring homebuying season, and this year promises to be another busy one.
Homebuying demand is expected to be strong as a wave of millennials age into their prime homebuying years, and although mortgage rates jumped in early January, they are still historically very low.
But the focal point in 2022 will be inventory. More specifically, existing home inventory which makes up a majority of the market and is at a record low to begin the year.
Based on a recent survey from Fannie Mae, the net share of people that think it’s a good time to sell a home fell from 59% to 47% in January, the lowest level in 8 months. While that’s a significant drop, it doesn’t quite mean the sky is falling. At this time last year, a net share of 24% of people said it was a good time to sell.
Here’s why existing home inventory matters, and why it’s worth tracking if people think it’s a good time to sell a home or not.
According to the St. Louis Fed, the year began with the lowest supply of existing home inventory (910,000) and less than half of the active listings of pre-pandemic years.
Month/Year Active Listings Count December 2021483,266December 2020660,335December 20191,125,557December 20181,288,587 Data from St. Louis Fed.
The dramatic imbalance in supply and demand has been driving up home prices throughout the pandemic and threatens to continue to do so again in 2022 if more inventory isn’t brought online.
Housing inventory typically comes from two forms: existing homes and new homes. On the new homes front, homebuilders seem to be overcoming shortages in labors, lots, and materials to increase their output. In December, builders were completing single-family homes at a rate of 990,000 per year and new homes made up more than 34% of the total homes for sale – the largest share on record.
However, new homes have become drastically more expensive to build during the pandemic – and homebuyers are picking up the tab. In December 2021, it cost on average $439,000 to build a new home, compared to less than $300,000 in July 2020.
With a six month supply, the new home supply is considered balanced. But much of this supply is going to be unaffordable to many first-time homebuyers, especially as rising mortgage rates eat away at affordability.
So that leaves existing homes. And since you can’t exactly build an existing home, the only way to replenish supply is for homeowners to sell.
Sellers have had the upper hand throughout the pandemic, and with existing home inventory at a record low that power has only grown. So what’s with the declining belief that it’s a good time to sell a home?
Well, most home sellers are also homebuyers. And for all the reasons stated above, homebuying sentiment is at an all-time low.
Fannie Mae found that 70% of people believe it's a bad time to buy a home compared to 25% that think it’s a good time to buy a home. At this time last year, 52% of people thought it was a good time to buy a home and 37% thought it was a bad time.
That creates an interesting dilemma. If homeowners won’t sell because they think it’s a bad time to buy, then there will be less inventory in the market, making it a worse time to buy. Sort of like a snake eating its own tail.
While it’s way too early to panic, it’s worth keeping an eye on seller sentiment as peak homebuying season draws near. If it continues to dive, homebuyers may be in for a competitive spring and summer. However, this survey has been volatile throughout the pandemic and is reactive rather than predictive.
It's also important to remember that at this time last year, we were in a very different place regarding the pandemic and housing market. It will be interesting to see if a year of vaccinations and 20% home appreciation will entice more homeowners to sell.
