As inventory builds, will buyers return to the market in early 2023?
The number of homes for sale jumped a record 15% year-over-year, but mortgage rates will dictate affordability and buyer interest.
- Days on market also jumped, an indication that inventory gains are being driven by houses staying on the market longer — not by new listings.
- Interest rates will be the key factor in bringing buyers back, but it’s hard to pinpoint how much rates will need to fall to entice buyers.
- Prices are still up nationally, but flattening out overall and dropping in more expensive metros.
A new Redfin report suggests that when sidelined homebuyers begin returning to the market, there will be more options to choose from.
The company's weekly report found the total number of homes for sale increased 15% year-over-year during the four weeks ending Dec. 4. That's a record jump, but it doesn't mean that new homes are coming on the market. The report noted that new listings declined more than 20% over the same period, an indication that houses are simply sitting on the market longer.
That trend is also reflected in the days-on-market numbers. According to Redfin's data, the typical home that sold was on the market for 37 days, up from 28 days a year ago — the biggest year-over-year slowdown since Redfin began tracking the data. The record low was in June, when homes were selling in just 17 days.
Inventory is needed, but mortgage rates are key
With many forecasters expecting either flat home prices or a slight year-over-year decline in 2023, "mortgage rates will dictate housing affordability," said Redfin Deputy Economist Taylor Marr.
"If rates continue declining, more buyers may wade back into the market, as they'll have lower monthly payments," Marr said.
With the average 30-year fixed-rate mortgage dropping for four consecutive weeks to 6.33%, what's the magic number that will make homes affordable enough to entice potential buyers?
Michael Simonsen, CEO of Altos Research, has pegged the inflection point at around 5.5%; NAR's senior economist Nadia Evangelou said a mortgage rate of 6% will make housing more affordable to many buyers.
Most housing market experts don't expect mortgage rates to get back to the ultra-low levels seen a year ago, so something above 5% should be the norm for the near future.
Prices haven't fallen enough to make a big dent in affordability
On a national level, prices haven't yet declined year-over-year, but they have dropped in 11 of the 50 biggest metro areas, according to the report. Six of those markets are in California, with the top three in some of the most expensive metros in the country: San Francisco led the way with a 3.6% drop, followed by San Jose (down 3.6% year-over-year) and Los Angeles (down 2.2%).
Areas outside California with the biggest declines were Detroit (down 1.4%) and Pittsburgh (down 1.1%). Austin, Philadelphia and Phoenix had price declines of less than 1% — but it's notable that this is the first time Phoenix has seen a year-over-decline since at least 2015, when Redfin began tracking the data.
The median home sale price was $355,500, still up year over year, but only by 1.9% — the slowest price growth since June 2020. With this week's drop in mortgage rates, the monthly payment on that median home would be $2,297, down more than $200 from a month earlier when mortgage rates were around 7%.
Affordability is still a concern, however, with monthly mortgage payments up 38% from a year ago.