The Housing Market Conundrum: Home Sales And Prices Soar While Inventory Shrinks

The U.S. housing market is barreling into 2022 with a magnified version of the dilemma it carried last year: a seemingly nonstop rise in home sales and prices while available properties continue to be an elusive commodity.

What Happened: Existing home sales were up by 6.7% from December to January to a seasonally adjusted annual rate of 6.50 million, according to the National Association of Realtors (NAR). On a year-over-year measurement, January’s sales were 2.3% below the 6.65 million recorded in January 2021.

"Buyers were likely anticipating further rate increases and locking-in at the low rates, and investors added to overall demand with all-cash offers," said Lawrence Yun, NAR's chief economist. "Consequently, housing prices continue to move solidly higher."

NAR reported the median existing-home price for all housing types in January was $350,300, up 15.4% from the $303,600 price level achieved one year ago. January marked the 119th consecutive month of year-over-year increases, the longest-running streak on record.

While prices rose, total housing inventory continued to decline. By the end of January, 860,000 units were listed, down 2.3% from December and down 16.5% from the 1.03 million level of one year earlier. Unsold inventory sits at a 1.6-month supply at the current sales pace, down from 1.7 months in December and from 1.9 months in January 2021.

"The inventory of homes on the market remains woefully depleted, and in fact, is currently at an all-time low," Yun said, adding that homes priced at $500,000 and below were disappearing. "Clearly, more supply is needed at the lower end of the market in order to achieve more equitable distribution of housing wealth."

First-time buyers were responsible for 27% of sales in January, down from 30% in December and down from 33% in January 2021. Individual investors or second-home buyers purchased 22% of homes in January, up from 17% in December and from 15% in January 2021. And all-cash sales accounted for 27% of transactions in January, up from 23% in December and 19% from January 2021.

See Also: Benzinga's All Access

What Happens Next: Yun warned that increasing mortgage rates will exacerbate the problems facing would-be buyers seeking affordable homeownership opportunities.

"First, some moderate-income buyers who barely qualified for a mortgage when interest rates were lower will now be unable to afford a mortgage," he said. "Second, consumers in expensive markets, such as California and the New York City metro area, will feel the sting of nearly an additional $500 to $1,000 in monthly payments due to rising rates."

Yun’s pessimistic forecast was echoed by the new Home Value Index data published by Zillow Group Inc. Z (NASDAQ: ZG), which showed average values rising 1.5% from December to January to $325,677, up 19.9% from a year ago. This represented an all-time high over the past 20 years. Zillow added monthly home value growth accelerated from December to January in 38 of the nation's 50 largest metropolitan areas.

"Homebuyers today are making bids and closing deals despite some of the most challenging conditions ever: record-few homes for sale to choose from, priced at double-digit gains from last year, financed at sharply rising mortgage rates," said Jeff Tucker, senior economist at Zillow. "It remains to be seen how long buyers can weather this storm, and how long homeowners will watch values rise before deciding to list. Neither has blinked yet. Expect another sizzling hot spring shopping season."

Separately, Redfin Corporation RDFN reported homes were selling faster than ever during the four weeks ending Feb. 13, with a record 57% of homes going under contract within two weeks of being listed. Buyers were also paying more — a median $1,997 per month.

“The acute shortage of new listings of homes for sale is the biggest problem the housing market faces right now,” said Redfin Deputy Chief Economist Taylor Marr.

“If you think of the housing market like a bathtub, water (supply of homes for sale) is flowing down the drain (buyers sucking up supply) faster than new water (new listings) is coming in through the faucet. Rising mortgage rates may slow the drain down a bit (cool demand) as record-high monthly payments take a toll on buyers’ budgets. Bottom line: without a flood of new listings, we will be sitting in a very shallow bath for a while.”

Photo: American Advisors Group / Flickr Creative Commons