The Housing Market Is Passing an Inflection Point This Spring, on the Way to More Balanced Conditions

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Annual home price appreciation has accelerated to record highs in each of the past 12 months, after surpassing the mid-2000s housing-bubble high watermark of 11.9% in April 2021. [1] That run of records is likely to end soon, as the housing market passes an inflection point. That doesn’t mean a housing crash is coming or even that prices will fall, but rather that the pace of price growth is likely to decelerate and more homes will be available for sale. This rebalancing would be welcome news for buyers, especially those purchasing their first home.

Rising inventory

The level of active inventory is the housing market’s barometer, gauging the relative pressure of demand versus supply. When demand persistently outstrips supply, the stock of homes available for sale is depleted. Like dropping barometric pressure, plunging inventory usually foretells stormy conditions: faster price growth and faster sales. That’s exactly what the market has delivered for the past year and a half.

Now, after months of plumbing record lows, inventory finally began to rise in March, not just following seasonal trends but increasing enough to begin closing the gap with inventory levels of a year ago. It now looks likely that inventory will notch year-over-year growth sometime later in 2022, which hasn’t occurred since September 2019.

More inventory is both the consequence and the cause of a more balanced housing market: It gives home shoppers more options to choose from – limiting the number of buyers bidding on each home – and lights a competitive fire under sellers and their listing agents to make their homes shine, and to be wary of overpricing. Inventory may increase enough later this year to slow the frenetic pace of the market, as measured by the median home seller accepting an offer in just six days so far in April.

How far does it still have to go?

The pendulum might finally be starting to swing back toward a more balanced housing market, but it will take time to get there. And prospective buyers still won’t find much reason to cheer, as higher interest rates will keep homeownership costly, and slowing price growth is unlikely to end with falling prices.

ow long might it take? Well, even if inventory reaches same-month 2021 levels this summer or fall, that will still leave inventory down by about one-third from normal, pre-pandemic levels. At the pace of inventory recovery observed in March, inventory would take about 30 months to reach 2019 levels. So circle September 2024 on your calendars to see if this extrapolation held true. [2]

If you trust the wisdom of crowds, check with the roughly 100 housing market experts surveyed by Zillow last quarter, whom we challenged with this exact same question: 38% said they expected inventory to recover by the end of 2024, narrowly edging out 2023 (37%) as the most cited year.

Is this a bubble about to pop?

No, and in fact, the expectation of another crash could contribute to keeping homes so unaffordable. Builders have been firing on all cylinders, and with more homes under construction than any time since 1973, they understandably feel exposed in the event of a housing downturn. If they trim their construction plans out of caution, we will miss out on one of the best hopes we have for net new inventory on the market, and the inventory crunch that’s helped push prices up will persist for longer than expected.

If prices did begin to fall, we know there are millions of stymied first-time buyers, or younger millennials soon to be aging into that situation, waiting in the wings to snap up homes if they see a bargain. Those first-time buyers will continue to feel the pressure from rising rents, which jumped 17% in just the past 12 months. And a generally high-inflation environment will keep homeownership looking attractive as a hedge against inflation.

Most existing homeowners are insulated from high mortgage rates, thanks to more than 90% of loans in the past several years being vanilla fixed-rate, fully amortizing mortgages. That keeps people’s current bills affordable, and will prevent a foreclosure wave like the one that helped cause the housing market to spin out of control and crash in 2008. [3] That keeps people’s current bills affordable, and will prevent a foreclosure wave like the one that helped cause the housing market to spin out of control and crash in 2008.

[1] U.S. Zillow Home Value Index, mid-tier, smoothed and seasonally adjusted. The pre-pandemic record-high annual appreciation was 11.9%, in October 2005, which was matched in April 2021 and has climbed again every month until reaching 20.6% in March 2022.
[2] Relative to 2019 levels, raw monthly inventory for the U.S. rose from a 54.1% deficit in February to a mere 52.3% shortfall in March. A constant pace of a further 1.77 percentage point reduction in the gap against 2019 levels every month would take 30 months to reach parity.
[3] Urban Institute Housing Finance: At a Glance Chartbook, April 2022, p. 9: https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-april-2022

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