JRE - Surprise Mr. Musk Home Prices Have Been Rising Not Falling

2023-06-06 02:44:07 ET

Summary

• Despite high mortgage rates and lower sales, home prices in the US are increasing again due to low inventory levels.
• The "months of sales" ratio indicates that demand is again exceeding supply, putting upward pressure on home prices.
• High mortgage rates are discouraging homeowners from listing their homes, keeping inventory low, and driving prices up.

A week ago Elon Musk tweeted the following about housing, "Commercial real estate is melting down fast. Home values next." He may be right about Commercial real estate but the part about home values is just fear talk. It has to be since he's too intelligent and obviously hasn't seen the numbers that explain the true situation.

I analyze housing markets throughout Southern California for a number of real estate boards and mortgage companies. In the last three months we've seen home prices do something unexpected - rise.

So, we decided to analyze the same numbers at the national level to see what is happening there, and it's the same thing. Home prices are moving higher, not lower, and it's happening for a very interesting reason.

Home prices can't go down if there aren't any homes for sale

There is no doubt that high mortgage rates are restricting the purchase side of housing since fewer people qualify to buy a home. And it's also a psychological factor because many who do qualify don't buy fearing prices are going to decline. Sales statistics confirm this as sales are lower by 25% to 30%.

This buy side of housing is what everyone focuses on but there's the other side which they're ignoring - the supply side. The chart below graphs the number of homes for sale across the United States. There's a seasonality to it but the basic trends are there.

It shows that there are currently 845,310 homes for sale which, as you can see, is near historic lows. While there are fewer home buyers, there are also fewer home sellers.

Low inventory is beginning to draw home prices higher again

Saying that home prices are moving higher again sounds a little crazy since it's so contrary to what people think or believe, but it's true. At least that's what the metrics are telling us.

The classic housing metric that measures supply and demand is called the "months of sales" ratio. It's inventory divided by the sales rate. For example, if there are ten homes for sale and the market is buying two homes a month, it's going to take five months to sell off that inventory. If the ratio is high, it means supply is overbalancing demand. If the ratio's low it means demand is exceeding supply. The chart below shows this metric at the national level.

The red area shows when supply is greater than demand and there'll be downward pressure on home prices. The green area is when supply is low compared to demand and there'll be upward pressure on home prices. You can see from the chart the low ratios of 2021 and 22 which produced the large price gains of those years. The current ratio is approaching those levels again and we're starting to see the results. Prices have flattened and are beginning to move up again

One can just see the upward movement of home prices this year in the chart. In the last five months home prices are up .4%. While this is very small number it clearly shows that home prices aren't collapsing as many expected. We expect this price increase to continue.

High mortgage rates and low new listings

What happened? High mortgage rates are having an effect no one expected. Besides restricting buyers it's also keeping homeowners from listing their homes. No one wants to list a home with a 4% mortgage and rebuy somewhere else at 7%. So homeowners are staying put.

And if no one lists, inventory remains low even if the sales rate is low. This strange balancing act is what's happening, and it was unexpected. The low number of new listings is keeping inventory low and giving home prices an upward slant again.

Will this change?

It could but it will take time. This means there is little price risk in the housing market. The supply just isn't there. And unless people change their mind and become willing to sell a home with a 4% mortgage and buy one with a 7% mortgage, we don't see that changing.

Change can only occur if rates come down and homeowners begin to list their homes again. But then buyers will increase too. Right now the situation is stable and there is no crash ahead as Elon forecast.

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