High Interest Rates Lead to More Inventory | Guest Post
Higher-for-longer interest rates continue to dampen demand and drive more inventory. As of Monday, June 3rd, the DMAR eleven-county area had 9,159 active listings available for sale. To find a higher number, you’d have to go back to 2012 when active listings were 10,591. Of course, numbers mean the most when they are set within a context.
In 2006, during the housing bubble, extreme supply outpaced demand; May active listings crushed a record-breaking level of 30,457. Juxtaposed to May 2021 when historically low interest rates drove inventory shortages and a buying frenzy, active listings hit a record-low 2,075 homes for sale.
The average number of active listings during the month of May from 1985 to 2024 has consistently been just under 15,000 (14,895 to be exact). If I examine only the post-recession time period of 2012 to 2024, the average number of active listings drops to 6,609. If you further limit the comparison to what groups like ICE and Altos deem as a “normal” period of time, or pre-pandemic 2017 to 2019, the DMAR 11-county area averaged 7,074 active listings for sale in May. Inventory in the Denver market has not only recovered but now it is offering buyers 29 percent more inventory to choose from compared to pre-pandemic. Interestingly, the historical increase in active listings from April to May is 7.5 percent, on average. This May, active listings jumped 31 percent from April, a new record-high increase.
Andy Walden, Vice President with ICE Mortgage Technology (formally Black Knight) noted in its June 3rd report of April data that “inventory seems to be the primary differentiator when it comes to the bifurcation we’re seeing in housing market temperatures across the country.” With states like Texas, Florida and California driving the bulk of the inventory gains while also experiencing some of the largest price declines.
Per Altos Research, nationwide inventory is up 39 percent from last year, however, inventory remains down 30 percent from their “normal” for this time of year. Denver Metro, comparatively, is up 75 percent from last year, and up 29 percent from those same “normal” years. Yet, while other inventory-saturated markets experienced monthly negative price changes in April, Denver remained positive. ICE measured Denver’s April 1-month price growth at 0.2 percent. Looking back, we might ask, was that the peak? Maybe….
While it will be another month until appreciation data is available, both DMAR's median and average price growth reversed with just under 0.5 and 0.75 percent declines respectively during the month of May. New pending sales also slowed from an 8 percent increase during April to just under a 2 percent increase in May. Nationwide mortgage purchase applications dropped 2 percent during the month of May as rates started and ended the month at 7.4 percent. The only two times since 1995 that mortgage purchase applications were lower occurred when rates climbed to 7 percent in April 2024, following a decline from an 8 percent peak in October 2023.
Year-to-Date Closed Sales are also lagging, lower than any previously reported January through May timeframe since 2012. Although May closings popped 6 percent from April, overall Closings are down just over 5 percent year-over-year and down 2 percent year-to-date.
As long as rates stay higher for longer, demand will be suppressed, inventory will rise and this will put downward pressure on home prices.
So how long will rates stay higher?
The economy is slowing, it’s also incredibly resilient. Personal income increased 0.3 percent month-over-month and consumer spending was up 0.2 percent. Retail Sales reported earlier this month was flat month-over-month. While these figures are all down compared to the previous month, indicating signs of slowing, they remain strong when compared to last year.
Consumers are anxious, but also confident. After three straight declines of the confidence index, consumers are feeling good again. Maybe it’s May’s flowers and the summer breeze, or the resilience of the American consumer, but the Conference Board’s Consumer Confidence Index jumped to 102 in May from an index of 97.5 in April mostly based on their assessment of current business and labor market conditions. Individuals making over $100k or under the age of 35 expressed the largest rise in confidence. Which might explain why our over one million market had the highest increases in pending and closed homes in May.
May’s tempered Inflation report provided hope, but continued progress will get harder. Using the modest monthly increase of 0.2 percent observed in May to project inflation for the rest of the year, Core PCE inflation could rise from its current 2.8 percent to 3 percent by year-end. This potential increase is due to the replacement figures from 2023 becoming quite low in the second half of the year.
The Federal Reserve has their work cut out for them and require softer inflation data for longer before they consider reducing the fed rate. Unemployment and job numbers for May might help, especially after April’s 3.9 percent unemployment and lower-than-expected 175,000 jobs created. There are also expectations that the stock market could see a 10 percent correction during the 3rd quarter 2024, this would dampen American’s wealth effect, curtailing spending and soften an already slowing GDP, which has dropped from 3.4 percent during the fourth quarter 2023 to 1.3 percent for the first quarter of 2024.
The second half of 2024 presents more uncertainty. Lawrence Yun was recently quoted as saying he expects a 9 percent increase in existing home sales from 2023 to 2024 and an additional 13 percent increase in 2025. His forecast assumes falling long-term interest rates. While I hope to see the lower rates he anticipates, I'm not convinced we're there yet. Considering the Fed's wait-and-see approach through the summer, with only moderate hopes of a rate cut in September, it seems Powell shares this uncertainty.
One indisputable fact, however, is Yun's question: "How can home sales be this low when we have so many people living in this country?" Despite existing home sales being equivalent to those in 1995, the United States today has 75 million more residents, with the U.N. projecting our country’s continued population growth through 2100. Additionally, there are 40 million more Americans working today than in 1995.
Which begs the question, when rates do come down, what will happen with the excess inventory?
Until next time, Nicole Rueth with Movement Mortgage and DMAR’s Market Trends Committee. It’s my pleasure to keep you updated.
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