Slow Housing Market’s Questionable Excuse (And a Much Better Alternative)

Step right up, ladies and gents, as we plunge into the roller coaster ride that is the housing market of 2023. Hold on to your hats and suspend your disbelief, because the word ‘inventory’ is popping up more frequently than my neighbour’s annoying Jack Russell. Apparently, it’s the premier scapegoat for sluggish home sales this year. But does this excuse hold water, or are we drowning in baseless claims?

To answer that, let’s first take a quick peek at the elephant in the room – the data. We’ve all been eagerly waiting for this week’s release of Existing Home Sales from the National Association of Realtors (NAR), which felt more exciting than the latest season of “Stranger Things”.
Starting the year with a bang, sales then faded faster than my interest in New Year’s resolutions. The chart above looks like a roller coaster designed by a madman, reaching dizzying highs and shocking lows in the span of a few years (Covid, what’s up?).

The NAR, in their infinite wisdom, have elected INVENTORY as the primary villain behind the slump. Yes, more inventory might spark more home sales, but it seems we might be ignoring a hefty elephant in the room: RATES.

Defending the NAR (somebody has to!), they’re pretty switched on about the rate problem. However, their fixation on inventory seems as overblown as my diet after a pizza binge. Let’s face it, if you had a comfy 3% mortgage, would you be thrilled about swapping it for a hefty 7% one? I didn’t think so.

The NAR Chief Economist, Lawrence Yun, says, “There are simply not enough homes for sale.” He believes the market could swallow a doubling of inventory. But is this wishful thinking? Or is it like hoping for a pet unicorn for Christmas?
The first chart here might fool you into thinking inventory is playing hide and seek, but things get a tad more interesting when we check out the “months of supply.”

Deciphering these graphs is a bit like trying to understand quantum physics after a bottle of wine, so here’s the scoop: inventory in units is still hiding in the shadows, while “months of supply” is standing tall.
Fast forward to this week, and the Housing Starts data (which is basically the construction world’s version of “On your marks, get set, go!”) hinted at a slowdown in demand.

But don’t worry! Homebuilders are sipping their optimism juice, according to the National Association of Home Builders (NAHB).
If high rates are the annoying neighbor ruining the housing market block party, what’s the solution? Well, that’s as easy to answer as, “Why did the chicken cross the road?”
Last week, our old friend inflation played nice and rates dropped like my jaw at an all-you-can-eat buffet. But this week, labour market data fired back, driving rates up again.

Freddie Mac’s index shows that the average top-tier 30-year fixed rate is back around the dreaded 7% mark. But take it with a pinch of salt. Freddie’s survey sometimes feels like it’s living in the past, so the rates might be a bit higher in reality.

So, what’s next? We’re all on tenterhooks for next week when the Fed announces its latest rate hike. Will this be the last hike for a while or will they double down on high rates like a poker player with a royal flush? We can only wait and see. Just know that volatility could be as wild as a season finale cliffhanger. Stay tuned, folks!