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Why Home Prices Continue to Rise Despite Inventory Recovery
Despite the recent increase in housing inventory, home prices remain stubbornly high. This trend has left many prospective home buyers puzzled. The housing market, emerging from a period of scarcity, is experiencing an unusual phenomenon where the supply of newly constructed homes is notably high compared to existing homes.
The current inventory level of both new and existing homes stands at a 4.4-month supply, indicating a market imbalance favoring sellers. This shift can be attributed to unique market dynamics dating back two decades to the subprime mortgage era. Traditionally, an abundance of supply tends to stabilize or reduce prices, but in this case, prices continue to climb.
The supply surge is primarily seen in the new home market, with a nine-month supply observed, nearly three times higher than existing homes. This deviation from the norm is a result of fluctuating mortgage rates and past housing market crises. The housing sector's intricate landscape is a product of economic events that set it apart from previous cycles.
In the early 2000s, the housing market experienced unprecedented growth fueled by subprime mortgages, leading to a subsequent crash and a severe recession. This tumultuous period drastically reduced housing starts, hindering the sector's recovery for years. The COVID-19 pandemic triggered a surge in demand due to record-low mortgage rates, prompting a spike in housing starts in 2021.
The discrepancy in supply between new and existing homes can also be attributed to volatile mortgage rates, which hit historic lows during the pandemic but soared soon after. Many homeowners locked in low rates through refinancing, disincentivizing them from selling and moving. Builders capitalized on this by adjusting mortgage rates to sustain demand.
While resale listings have improved slightly with a dip in mortgage rates, the market still faces challenges. The supply shortage is most acute in the mid-tier price range, where demand is highest. Despite an increase in supply across all price segments, the lower-end tier sees the most significant growth, indicating sustained demand outstripping available inventory.
Home prices, as of the latest data, remain elevated, with certain markets experiencing persistent price gains due to low inventory levels. Regions with increased housing supply are witnessing price declines relative to the previous year. Analysts anticipate a potential cooling of prices and a decline in mortgage rates in the coming months, but the future balance between supply and demand remains uncertain.
As inventory levels continue to rise and the mortgage rate lock-in effect fades, the market is poised for further changes. While increasing supply may support new construction and moderate price growth, the delicate equilibrium between supply and demand will ultimately determine the trajectory of housing prices in the near future.
Original Article: https://www.cnbc.com/2024/07/09/why-home-prices-are-still-rising-even-as-inventory-recovers.html
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