Aerial homes

Overall housing inventory declining, but that won’t last 

While inventory is trending down ahead of the holidays, the pace is slower compared to recent years.

November 23, 2022
2 minutes

Key points:

  • The expectation in early 2023 is that demand will remain weak, leading to increased supply and price reductions.
  • The percentage of price reductions is already high heading into the new year.

As the real estate market heads into the slower season, current trends are pointing toward weaker demand leading to lower home prices in early 2023.

In the latest weekly update from Altos Research CEO Mike Simonsen, the company's data indicates a steady decline in inventory is taking place and the number of new contracts is already at the low levels usually not seen until Christmas week.

The general trend is typical for this time of year, as potential buyers and sellers set aside real estate activity to focus on the holiday season. Some unsold homes that were pulled from the market in the late fall will be back in the new year, along with new listings.

The amount of homes for sale in the U.S. was around 568,000 in the second week of November, which is down slightly from the week before. It's a slower decline than usual, partly because delayed new construction was finally hitting the market.

New contracts signed for homes in the second week of November were around 47,000, which is 45% lower than a year ago, Simonsen said.

What does that mean for 2023? While overall inventory is currently declining, that isn't expected to last long. With mortgage interest rates still above affordability levels, the traditional spring market should see a boost in supply — but perhaps not as many buyers, Simonsen said. 

Even if supply remains low, demand appears even weaker. That will impact prices more than it did in the fall.

"It's hard to imagine now how home prices could hold up in the next year with this equation," Simonsen said.

With new construction taking up a larger market share of home listings, he said it will set up an interesting scenario at the beginning of 2023 where price reductions could happen faster.

"Builders may be more likely to drop their asking prices more quickly than sellers who live in the house," Simonsen said.

Nationally, the percentage of listings with price reductions has remained flat at around 43%, which is much higher than usual for this time of year. Price reductions are typically more in the 20%-30% range at the beginning of the year, so higher levels are another indication that home prices will decline in early 2023, Simonsen said.

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