Rising Rates Vs. No Inventory

By Steven Thomas – Reports On Housing

There are two opposing economic forces impacting the housing market right now, rising mortgage rates and a record low supply of homes available to purchase.

Opposing Forces

There simply are not enough homes available for buyers and rising rates have not yet had an impact on the insanely hot housing market.

The supply chain problems have been well documented across the United States and around the globe. One of the hardest hit industries is new cars. The supply of available new cars has dwindled down to record lows. As a result, dealers are adding a “market adjustment fee,” a line-item cost above the MSRP. The fee ads anywhere from a few thousand dollars to as much as $20,000 more for a popular model. It has everything to do with supply and demand. Consumers looking for a new car are confronted with very few options and rising car prices. To get their hands on one, many are willing to pay the surcharge.

Housing feels like it too is suffering from the supply chain problem with seemingly nothing available to purchase. Last year the inventory in Los Angeles County started the year at an all-time low with 7,668 available homes. It hit 7,185 on June 1st, rose and peaked in August, and then continued to plunge until only 4,432 homes were on the market on January 1st of this year, just a few weeks ago. Today, there are only 5,059 homes, adding 627 during the first few weeks of the year. The difference between this year and last year’s record low is striking. There are 2,647 fewer homes today, 34% less. Every price range has been similarly impacted.

Comparing today to every year since 2017 is mind blowing. In 2019, prior to the pandemic, there were 7,951 additional homes on the market, 157% more, two-and-a-half times the number of homes today. In 2017 there were 4,991 additional homes, 99% more, nearly double. Comparing today’s level to each year illustrates just how acute today’s inventory crisis has become.

The inventory was already trending lower prior to the pandemic, but the pandemic accelerated the issue as fewer homes were placed on the market despite soaring demand. In 2020 and 2021 combined, there were 9,749 fewer FOR-SALE signs compared to the average number between 2017 and 2019, 5% less.

Since ringing in a New Year, mortgage rates have been steadily climbing, eroding home affordability. According to Freddie Mac’s Primary Mortgage Market Survey®, rates have risen from 3.05% on December 23rd to 3.56% as of January 20th, up a half of a percent in just 4-weeks. It has many speculating that even higher rates are coming. Throw in a volatile stock market, and many are beginning to wonder if these changes are just the beginning of the end to the pandemic run on the housing market.

First, it is best to explain why mortgage rates have been moving higher. Investors and Wall Street had already digested the fact that the Federal Reserve was tapering their purchases of Mortgage-Backed Securities and were going to be raising the Short-Term Federal Funds Rate (tied to automobile loans and credit card debt and NOT to 30-year mortgages) starting this March. Additionally, they just announced that they were going to be draining their balance sheets. That was unexpected. The Federal Reserve went from calling inflation transitory, or temporary, and doing nothing just a few months ago, to acknowledging that it was an issue and that they were going to do everything in their power to slow inflation’s grip on the economy. It was as if the Fed acknowledged that they made a mistake and that they were behind the 8-ball, and now they are engaging in a “hurry up offense” style to try and make up for lost time. The markets reacted and rates rose by a half a percent in 4-weeks.

There is an impact to rising rates. The rise from 3.05% to 3.56% is an additional $252 per month for a $900,000 mortgage, or $3,027 per year. However, with such a limited supply of available homes the impact is not being felt on the street. Today’s rate may be the highest since the start of the pandemic, but it is still a really great rate. The extra $252 per month is more of a “market adjustment fee” for housing that is easily absorbed due to the extremely limited number of homes available. Homes are still flying off the market as fast as they are coming on. Throngs of buyers are waiting in lines for the opportunity to see a home that is placed on the market. Multiple offers are the norm. After receiving 10, 20, or 30 offers on a home, the sellers are calling all the shots, sales prices exceed their asking prices, and home values continue to rapidly rise.

Why has the rise in rates not yet affected the housing market? The answer is simple: rates have not climbed high enough to materially slow demand. Mortgage rates climbed considerably in both 2013 and 2018, which caused a shift in the market. Demand cooled, the inventory increased, market times grew, and the market slowed from a Hot Seller’s Market to a much more balanced market. In 2013, rates rose from 3.34% to 4.57%, and in 2018 they rose from 3.99% to 4.94%. The recent runup in rates is much smaller. If they continue to climb, then the market could cool. But, for now, Wall Street and investors have digested future Federal Reserve moves and they most likely will not rise much more from here. Rates would need to climb to 4% or higher to slow housing. At 4%, the difference in payment for that same $900,000 mortgage example would be $478 more per month, or $5,739 per year. At 4.25%, it would be $608 per month, or $7,299 per year.

The recent rise four week rise in mortgage rates had no real impact on the current pace of housing. It will be important to watch how mortgage rates unfold in the weeks and months to come. Until rates rise substantially from here, it is business as usual, an insanely hot housing market in Los Angeles County.

Active Listings

The current active inventory climbed by 7% in the past two weeks.

The active listing inventory increased by 327 homes in the past couple of weeks, up 7%, and now sits at 5,059 homes, its first rise since October. It is the Winter Market. There just are not enough homes that come on the market during the winter months until the housing hits the second half of March. This is coming on the heels of the slowest housing patch of the year, October through December in terms of the number of homes placed on the market. With today’s heightened demand, homes are placed into escrow nearly as fast as they are coming on the market, like a revolving door. It is just too difficult for the inventory to rise much until spring, so expect it to remain flat or may even drop for the next several weeks. The only caveat to this is rising rates. If rates rise another half a point and breach 4%, then the inventory will rise at a swifter pace sooner.

Last year, the inventory was at 7,706, 52% more, or an additional 2,647 homes. The 3-year average prior to COVID (2017 through 2019) was 10,633, an extra 5,574 homes, or 110% more, double compared to today. There were a lot more choices back then. For December, there were 3,744 new FOR-SALE signs in Los Angeles County, 183more than the 3-year average from 2017 to 2019, 5% extra. That’s the first time since July where there were more homes that came on the market compared to the pre-COVID average.


Demand declined by 2% in the past couple of week.

Demand, a snapshot of the number of new escrows over the prior month, decreased from 3,073 to 3,637 in the past couple of weeks, shedding 66 pending sales, down 2%. Homes start coming on the market at a faster pace as the month of January progresses, gaining steam throughout the month of February as well. Expect demand readings to surge as more homes become available over the next four weeks. With surging demand and a relatively flat inventory, the market will only grow hotter. Market times typically drop to its lowest point of the year sometime in April.  The small dip in demand is not due to higher rates. Only if rates continued to climb to a much higher level would the impact be felt within the real estate trenches.

Last year, demand was at 4,511, 24% more than today. Year over year comparisons will be off through February due to market changes because of COVID. A much better comparison is looking at the 3-year average prior to COVID (2017 to 2019), which was 3,633 pending sales, 1% more than today.

With an increase in the inventory and a slight drop in demand, the Expected Market Time (the number of days to sell all Los Angeles County listings at the current buying pace) increased from 38 to 42 days, its lowest level for this time of year. At 42 days, it is an insane, Hot Seller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. Last year the Expected Market Time was at 51 days, slower than today. The 3-year average prior to COVID was at 90 days, much slower than today and a Slight Seller’s Market (between 60 and 90 days).

Luxury End

The luxury market cooled a bit on the backs of a rising luxury inventory.

In the past two weeks the luxury inventory of homes priced above $2 million increased by 94 homes, up 8%, and now sits at 1,259. Luxury demand increased by 6 pending sales, up 2%, and now sits at 310. With a large increase in the luxury supply compared to the small increase in demand the overall Expected Market Time for luxury homes priced above $2 million increased from 115 to 122 days. At 122 days, it is still an extremely strong market for luxury. Year over year, luxury demand is down by 45 pending sales or 13%, and the active luxury listing inventory is down by 863 homes or 41%. The Expected Market Time last year was at 179 days, still great for luxury, but a lot slower than today, indicating just how unbelievably hot the luxury market is right now.

For homes priced between $2 million and $3 million, the Expected Market increased from 70 to 77 days. For homes priced between $3million and $4 million, the Expected Market Time increased from 96 to 97 days. For homes priced between $4 million and $8 million, the Expected Market Time decreased from 173 to 161 days. For homes priced above $8 million, the Expected Market Time increased from 327 to 400 days. At 400 days, a seller would be looking at placing their home into escrow around March 2023.

Report and Images provided by Reports on Housing

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