Windermere Chief Economist Matthew Gardner demonstrates how the U.S. housing market is adapting to low inventory levels. He touches on the new construction industry, supply changes in large metro areas, median home sale prices, and more.

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.

Low Inventory Housing Market

Hello there, I’m Windermere Real Estate’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew. As we are all aware, the housing market has softened considerably with the number of existing homes available to buy close to record lows. Today we are going to talk about supply, and how the market is starting to adapt to low inventory levels.

Housing Market Inventory

This chart shows the average number of homes on the market by year. Although year to date we have seen a little bit of an uptick, it’s clear the country remains supply-starved. And with just over three months of inventory—as opposed to the normal four to six—the market is clearly out of balance. But even though inventory levels have risen nationally, as I’ve said many times before, not all markets are equal.

Housing Inventory Changes in Metro Areas

This chart shows how supply levels have changed. The data here is representative of the 100 largest metropolitan areas in the country. The horizontal axis shows the change in inventory versus the second quarter of 2022, while the vertical axis shows the difference and the number of homes for sale versus the second quarter of 2019. I think you’ll agree that the difference is stark. Although two-thirds of the metropolitan areas have seen the number of homes for sale improved versus the same period a year ago, just one (Austin, TX) had more homes for sale higher in the second quarter of this year than it had in the second quarter of 2019.

• And even more stark was the fact that inventory levels in 53 of the 100 largest metropolitan areas were down by more than 50% compared to the same period three years ago.

Interestingly, on a percentage basis, smaller metro areas saw the greatest decline compared to three years ago. For example, in Hartford, CT, the average number of homes on the market in the second quarter was just over 900, down by 80% from the second quarter of 2019 where there was an average of over 4,400 units for sale. Supply levels were down by 78% in Stamford, CT; 75% in New Haven, CT; and 74% in Allentown, PA.

It is true that supply levels are generally higher when compared to a year ago, with the greatest increase being seen in select markets in Florida, Tennessee, Texas, and Oklahoma; however, other than in Austin, supply levels remain well below their long-term averages. So, how is the market adapting? The answer is rather interesting. Even with all the talk of escalating material, land, and labor costs, it’s the new home industry that has been taking advantage of the lack of housing supply.

New Construction Market Trends

This chart shows the share of new homes on the market compared to their resale counterparts—here we are just looking at single-family homes. Historically, new construction makes up roughly 10% of active listings at any one time, but as you can see here, that share has been rising not just since the end of the pandemic but for the past several years. Although off the high seen a few months ago, 30% of the single-family homes for sale this July were brand new. I find this particularly interesting because, historically speaking, a premium was paid in order to buy a new home rather than an existing one.

Median Sale Prices: New and Existing Homes

• As you can see here, the spread in median sale prices, which was pretty stable from 1990 until the bursting of the housing bubble, grew significantly starting in 2011 and in 2022. The premium averaged 16%. But when we look a bit closer at the numbers, they gives us a somewhat different picture.

• You can see here the spread has dropped to just 6%. And in June of this year, the difference was a mere $1,000.

With the share of new homes for sale holding at a four-decade high, the share of sales themselves is at a level we haven’t seen since 2005. But even though we know that there is demand for housing, shouldn’t sales be constrained by mortgage rates? Well, what is happening is that builders are attracting buyers through incentives, and here we’re talking about mortgage rate buydowns which are becoming increasingly prevalent across the country.

In fact, a recent survey from John Burns Consulting suggested that 30% of home builders reported using interest buydowns more in the second quarter of this year than they had previously. And this is attracting buyers to visit new development communities.

An example of these buydowns is the 2/1 program that DR Horton—the largest home builder in the country—is offering at some communities. This program gives buyers a mortgage rate that starts at 3% for the first year, rises to 4% in year two, and then goes to 5% for the balance of the 30-year term. That’s pretty compelling, given where mortgage rates are today.

The bottom line is that as far as I can see, the new home industry will continue to take an outsized share of the market for the balance of 2023 and likely through most of 2024. That said, once the market starts to normalize, I expect them to pull back from these incentive programs, making them more likely to start raising asking prices, and we will return to the traditional spread between the prices of new and resale homes.

Although it’s pleasing to see more homes being built, I still believe that the country will still be running a housing deficit when it comes to meeting demographic demand and this will continue to hurt first-time buyers who continue to be priced out of the market.

As always, I’d love to hear your thoughts on this subject so feel free to leave your comments below. Until next month, stay safe out there and I’ll see you soon. Bye now.

To see the latest real estate market data for your area, visit our Market Update page.

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.

Windermere Chief Economist Matthew Gardner gives an updated look at U.S. home prices and housing affordability in 2023 by examining two key second-quarter reports from ATTOM Data Solutions and the National Association of Home Builders (NAHB).

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.

U.S. Home Prices 2023

Hello there, I’m Windermere Real Estate’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew. Today we are going to look at home prices and housing affordability. To do this I will be looking at the second quarter sales price data from ATTOM Data Solutions and we will also look at the just released National Association of Home Builders Housing Opportunity Index for the second quarter.

Are home prices dropping?

Starting with the year-over-year change in sale prices at the state level, there aren’t any great surprises. For the past several months I’ve been saying that as the Western U.S. saw the greatest price growth during the pandemic, so it’s not surprising to see most states sale prices in the quarter below the level seen a year ago. But it was pleasing to see that sale prices in 36 states either matched the level seen a year ago or were higher, and in some instances quite significantly so.

U.S. Home Sale Prices 2023 By State

And when we compare second quarter sale prices to their 2022 peaks, 33 states are at or above the highs seen last year, but most of the Western States have yet to fully recover. In the South, Louisiana is still lagging by a good amount, as is New York State on the East Coast.

But as you are all very aware, all markets are different. I thought it would be interesting to dig a little deeper into the data to see which metro markets have seen significant gains over the past 12 months. It’s going to be interesting specifically because of the fact that mortgage rates have risen so much.

Metro Areas: Home Sale Prices 2023

These are markets where sale prices are far above their 2022 peak sale prices. Now I must add that I only looked at markets where more than 1,000 transactions occurred in the last quarter, which takes out some of the volatility. Notably, even though the state of Virginia’s home prices in the quarter were flat when compared to their 2022 peak, the Roanoke market was up by over 9%. And in Pennsylvania, where state prices were only 1.2% above their 2022 peak, Reading is up by 7.6% and York by 7.4%. And in Georgia, where state sale prices were up a modest 1.6%, homes in Macon have leapt by over 13% and prices are up by 6.9% in Savannah.

But, on the other end of the spectrum, there are markets which are underperforming their respective states and, unsurprisingly, California tops the list with three of their metros seeing prices significantly below that of the state as a whole. In other parts of the country, several metro areas which were relatively affordable before the pandemic saw an influx of remote workers and this led prices to skyrocket, and these will take some time to recover. This is particularly true in the Austin and Boise market areas.

I would add that, of the counties across the country where there were more than 1,000 transactions in the second quarter, half have met or exceeded their prior peak and—of the half where sale prices were still lower—the average shortfall is only around 4% and there are just seven counties in the country where sale prices are down by more than 10% from their 2022 peaks.

Now, what I see in the data is that the U.S. housing market, although certainly not fully healed, is headed in the right direction even when faced with mortgage rates that remain remarkably high. So, with sale prices recovering and still faced with stubbornly high financing costs, what does affordability look like?

U.S. Housing Affordability 2023

Well, according to the National Association of Homebuilders (NAHB), of the 241 metros that they track, just 40.5% of sales in the second quarter were affordable to households making the area’s median income—that’s the second lowest share of sales seen since they started generating this dataset a decade ago. Now, their data does go back to 2004, but the interest rate series that they used to use was discontinued, so it’s not accurate to compare their data today with anything before 2012.

Most Affordable U.S. Housing Markets

These were the most affordable markets in the second quarter and their locations should not be of any great surprise. Average sale prices in these markets were measured around $203,000—that’s just marginally above 50% of the national sale price in the quarter, which was $402,600.

Least Affordable U.S. Housing Markets

And unfortunately this should not surprise you either. On the other end of the spectrum, the top-10 least affordable housing markets were all in California, but it gets worse than that. The top 15 least affordable markets again, all in California, and 19 out of the top 25 were in the Golden State!

As far as I can see, the ownership housing market is still showing remarkable resiliency, especially given that mortgage rates have more than doubled from their lows and they’ve risen from 4.8% at the start of the second quarter of last year to 7% at the end of the second quarter of 2023.

Now, I still expect to see rates starting to slowly move lower as we go through the second half of the year. This will help with prices and, to a degree, affordability, but until we see a significant increase in the number of homes listed for sale, the market is going to remain unbalanced.

As always, I’d love to hear your thoughts on this subject so feel free to leave your comments below. Until next month, stay safe out there and I’ll see you soon. Bye now.

To see the latest real estate market data for your area, visit our quarterly Market Updates page.

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.