The rise of active listings in this spring housing market reminds me of a zombie slowly rising from its grave. Yes, we found the seasonal bottom for housing inventory on April 14, but this year’s rise in active listings has been tepid at best.

Here’s a quick rundown of the last week:

• Total active listings grew 662 weekly, and new listing data is still trending at all-time lows.
• Mortgage rates fell last week as we started the week at 6.65% and got as low as 6.49% to end the week at 6.55%.
• Purchase application data rose 5% weekly as the streak of lower rates impacting the weekly data continues.

Weekly housing inventory

Well, the best thing I can say for spring 2023 inventory is that we found the seasonal bottom a few weeks ago. On the positive side, we’re at least seeing inventory rise — some had feared that because new listing data was trending at all-time lows, we wouldn’t see a spring increase in the active listings at all. This doesn’t appear to be the case for 2023.

However, new listing data is very seasonal and we have less than two months left before it starts declining again. I had hoped we would see more active listings before that period, but unfortunately that’s not the case. In fact, this data line has been absolutely crazy.

How crazy?

Last year, from April 22 to April 29, total single-family inventory grew by 16,311 in that one week. This year, from the seasonal bottom on April 14 to now — a whole month — total active inventory has only grown by 14,913.

• Weekly inventory change (May 5-12): Inventory rose from 419,725 to 420,381
• Same week last year (May 6-13): Inventory rose from 300,481 to 312,857
• The inventory bottom for 2022 was 240,194
• The peak for 2023 so far is 472,680
• For context, active listings for this week in 2015 were 1,108,932

According to Altos Research, new listing data rose weekly but is still trending at all-time lows this year. When you consider that a home seller is a natural homebuyer as well, you can see why the housing market broke after mortgage rates went on a roller coaster last year. Mortgage rates went above 6.25%, then declined back to 5% then spiked back to 7.37%. We have not been able to recover from that mortgage rate spike and it has bled into 2023 as well.

Last year, new listing data, while trending at all-time lows, was at least rising year over year. That is no longer the case after the second half of 2022.

New listing weekly data for this week in May over the past three years:

• 2023: 62,382
• 2022: 73,515
• 2021: 71,191

New listing data from previous years for the same week, to give you some historical perspective:

• 2017: 90,112
• 2016: 82,621
• 2015: 98,436

The NAR data goes back decades and it illustrates just how hard it’s been to get the total active listings back to the historical range of 2 million to 2.5 million. The next existing home sales report comes out this week and we should see an increase in active listings, which have been stuck at 980,000 active listings over the last three months.

NAR: Monthly active listings

NAR: Total active listing data going back to 1982 

I often get asked about the big difference between NAR and Altos Research inventory data. This link explains the difference. Overall, inventory data tends to move together, even if different sources are working with other numbers and have a different methodology.

The 10-year yield and mortgage rates

For 2023, one of the most important economic storylines has been the 10-year yield refusing to break below the critical levels I have talked about for months — the level between 3.37%-3.42%. I believed this level was going to be so hard to break under that I named it the Gandalf line in the sand. No matter how crazy things have gotten in 2023, the 10-year yield only broke it once, at the height of the banking crisis. That didn’t last long as we headed right back higher.

As you can see in the chart below, that line in the sand has been tested many times.

When I talk about mortgage rates, it’s really about where I feel the 10-year yield will go for the year. In my 2023 forecast, I said that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to 5.75% to 7.25% mortgage rates. 

Now if the economy gets weaker, meaning the labor market sees a noticeable rise in jobless claims, then the 10-year yield should break under 3.21%, going all the way to 2.72%. This will take mortgage rates under 6%, and if the spreads return to normal, this can get us below 5% mortgage rates again. Yes, I said below 5% again.

Can you imagine the housing market at that point? We would have much more stability. 

However, for that to happen, jobless claims would need to rise to 323,000 on the four-week moving average. We did have a big jump in jobless claims last week. However, this data line can have some odd quirks week to week, so focus more on the trend and the four-week moving average rather than one week’s data.

From the St. Louis Fed: “Initial claims for unemployment insurance benefits increased by 22,000 in the week ended May 6, to 264,000. The four-week moving average also rose to 245,250.”

Last week, mortgage rates didn’t move much, but as the year goes on, we will be tracking more and more economic data to get clues on the economic cycle and where mortgage rates will be heading. 

Purchase application data

The dynamics of the U.S. housing market changed starting Nov. 9, 2022, when the purchase application data began to react more positively as mortgage rates fell. Since that time, making some holiday adjustments to the data, we have had 17 positive weekly prints versus seven negative prints. Year to date, we have had 10 positive prints versus seven negative prints.

Last week, the weekly data showed a positive 5% print, while the year-over-year data shows a 32% year-over-year decline.

I view this data line as just a stabilization of the housing demand data, coming off a waterfall dive in 2022. However, this stabilization is critical because of what it has done: It has changed the housing dynamics.

When housing demand collapsed last year, the low inventory didn’t provide a big shield against pricing getting much weaker. Pricing in the second half of the year was going negative month to month, of course, from an overheating start in 2022. Starting from Nov. 9, the entire housing dynamics changed from demand collapsing to demand stabilizing.

This explains pricing getting firmer in 2023 due to the low inventory environment. Purchase apps look out 30-90 days before they hit the sales data, so we don’t have the sharp recovery data we saw during the COVID-19 recovery. However, we do have a good stabilization story here today.

I traditionally weigh this data line after the second week of January to the first week of May, and now that we are in the second week of May, I would say the 2023 purchase apps data is slightly positive, with stabilization for sure, just not a booming mortgage demand market with mortgage rates still over 6%.

The week ahead: Big housing data coming up

We have a jam-packed week with economic data, especially for housing. We have the builder’s confidence data, housing starts and existing home sales. Monday, we also have the New York Fed quarterly credit and debt update. Those charts are my favorites as they show how credit stress in the U.S. today doesn’t look like anything we saw in the run-up in 2008.

Since the foreclosure process has started again, we should be working our way back up to pre-COVID-19 levels. However, 30, 60, and 90-day lates are near all-time lows, and it took many years to build up the credit stress we saw from 2005 to 2008, before the job-loss recession.

Retail sales come out on Tuesday, which can move the bond market depending on what the report shows. As the year progresses, all these reports will give us more clues to see where the economy is heading. That’s critical since economic data can move the bond market and what can move the 10-year lower or higher drives mortgage rates as well. If mortgage rates head lower, we could see inventory drawn down faster during the seasonal decline period of fall and winter.

“My phone is ringing, and it’s usually first-time buyers or investors,” San Francisco Redfin agent Ali Mafi said in a statement. “First-time buyers are interested in looking at homes because prices have come down, though they’re still concerned about high mortgage rates. Investors who can pay in cash are honing in on luxury San Francisco condos because prices on those have dropped even more significantly than the overall market.”

While buyer activity is increasing month over month, home sales still sag below levels seen last spring. Pending home sales were down 21.1 percent year over year in February, but have increased monthly for three-consecutive months, according to data from the National Association of Realtors.

Existing-home sales also shot up in February, increasing by 14.5 percent after falling for 12 straight months. Sales remained 22.5 percent lower than 2022 levels, however.

The Redfin report found unequal distribution of price drops across the country due to extremely low inventory, with prices dropping in some parts of the country and rising in others.

Prices dropped in 28 of the 50 most populous United States cities, with the biggest drop seen in Austin where prices fell by 15.2 percent year over year. Following Austin was four Californian cities with San Jose at 12.9 percent, San Francisco at 11.7 percent Sacramento at 11.4 percent and Oakland at 10.8 percent.

In line with a recent trend of home prices decreasing in the West and increasing in the East and Midwest, prices increased the most in Milwaukee where they rose 14.1 percent year over year, followed by Fort Lauderdale at 8.5 percent, Virginia Beach at 6.9 percent, West Palm Beach at 6.7 percent and Providence, Rhode Island at 6.4 percent.

“Prices are still rising quickly in some places while they are down by double digits in big tech hubs, so it’s important for prospective buyers to work with an expert local agent,” Redfin Deputy Chief Economist Taylor Marr said in a statement. “One thing that’s true almost everywhere: It’s difficult to find a desirable, well-priced home for sale, so offer and negotiation strategies differ depending on where you’re looking.”

The national median home sale price fell 1.8 percent year over year to $360,500 during the week of March 26th — the sixth-straight week of annual declines after more than a decade of increases.

The monthly Realtors Confidence Index is an essential measure of what real estate professionals are seeing in their local markets and how the market is evolving on a monthly basis. The National Association of Realtors Research Group has produced the index since 2008, a time of turbulence in the real estate market.

One such measure is who is entering the market. Since October of 2022, the share of buyers who are purchasing their home without a mortgage has been more than one quarter of the market. The share is collected monthly in the Realtors Confidence Index and includes buyers who purchased primary homes, vacation homes and investors. 

These all-cash homebuyers are happily avoiding the higher mortgage interest rates, which touched 7% in the fall of 2022 before trending down to the current rate of 6.28%. While spring of 2022 saw a similar share of all-cash homebuyers, one needs to look back to 2014 before seeing similar shares.

Then, the mortgage interest rates were in the low-4% range. In the months before the COVID-19 pandemic, the share of all-cash buyers hovered in the teens. While mortgage rates may be one component, they do not tell the full story. So what happened and who is paying all cash for homes? 

One factor at play is the multiple-bid scenarios that took place throughout the COVID-19 pandemic. Homebuyers placed competitive offers on homes while inventory grew increasingly difficult to find. In March of 2022, sellers received an average of 5.5 offers.

Today, the average is 2.7 offers. As buyers wanted to find the perfect property, before interest rates rose, they were willing to offer all cash to sellers so their offer was not contingent on financing.

Additionally, buyers migrated to more affordable locations in low-density areas, allowing them to purchase a home with all cash, if they had housing equity from their past property. Thus, the typical homeowner, who owned their home for a decade, had more than $200,000 in housing equity to make a trade. 

The share of non-primary residence buyers is now at 18% from a high of 22% in January 2022. At that time, housing inventory dropped to historic lows making the environment ripe for investors. Investors joined the market to hold properties as short-term or long-term rentals, or to flip the home. 

As these all-cash buyers and non-primary residence buyers are finding success in today’s housing market, what is notably lacking are first-time homebuyers. Unfortunately, the share of first-time buyers remained suppressed at just 27% last month. While it is not the high seen during the First-time Home Buyer Tax Credit in 2010, it is also not the historical norm of 40% seen in the annual Profile of Home Buyers and Sellers report.

Notably, during the timeframe of the First-time Home Buyer Tax Credit, there was significantly more inventory than seen today. Unfortunately, the hope of seeing more first-time buyers in the market this year due to the lower competition has yet to materialize as higher mortgage interest rates have suppressed the share who can afford to purchase a home. 

First-time buyers today need more housing inventory to improve affordability. The low mortgage interest rates of 3% are not going to be seen any time in the near future. For buyers to afford to enter the market comfortability and sustainably, new construction, office conversion, and reimagining existing spaces such as vacant schools could hold the key.

What is the best news for mortgage rates long-term? It’s getting more supply of apartments! The best way to fight inflation is always by adding more supply; if your goal is to destroy inflation by killing demand, that is only a temporary fix.

Housing inflation post-2020 was one for the record books, not only because home prices accelerated in such a short time, but more importantly for the inflation data, rents took off, something that didn’t happen during the housing bubble years.

The government accounts for housing inflation by looking at rents, not home prices. The chart below is the CPI Shelter Index, and as you can see during the crazy years of the housing bubble (the gray bar), rent inflation was very tame compared to what we see in the data recently.

Since 44.4% of the Consumer Price Index is shelter inflation, it’s a massive deal in economics that rents took off in the last two years. Without rents taking off, the CPI data would look much more tame, like what we saw from the years 2000-2019.

As you can see in the chart below, core CPI wasn’t exploding at all this century until COVID-19 hit us. More supply of apartments coming on line will be good news for mortgage rates going forward. The history of global pandemics has always been inflationary early on, as the production of goods gets hit immediately. Then things tend to cool down over time from their inflationary peak level.

Over the next 12 months, the CPI data will account for the real-time cooling down of shelter inflation. And just like the data lagged early on when shelter inflation took off; the opposite will happen over the next year.

Tuesday’s housing starts data does show some promise on the front of attacking inflation and helping lowering mortgage rates, so let’s look at the report and find out what I am talking about.

First, however, remember that the housing market is still in a recession, which I wrote about on June 16, 2022. Housing permits have been falling as the builders simply have too much supply to be confident in building homes again. The housing market is still in a recession until housing permits rise in duration. Even though the builder’s confidence index has been rising recently, it still hasn’t led to a significant uptick in housing permits.

From Census: Building Permits Privately‐owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,413,000. This is 8.8 percent below the revised February rate of 1,550,000 and is 24.8 percent below the March 2022 rate of 1,879,000.  Single‐family authorizations in March were at a rate of 818,000; this is 4.1 percent above the revised February figure of 786,000. Authorizations of units in buildings with five units or more were at a rate of 543,000 in March.

As you can see in the chart below, this looks nothing like the housing peak in 2005 and the crash toward 2008. Back then, housing permits were collapsing as new home sales fell 82% from the peak. Currently, new home sales have been trending better as the builders are taking advantage of low existing inventory. Of course, once we get lower mortgage rates, that should help the builders sell more homes.

The big difference in this housing recession versus other cycles is that housing completions are still rising, which is unusual. However, because of the COVID-19 delays, we are still working through a backlog of homes under construction.

From Census: Housing Completions Privately‐owned housing completions in March were at a seasonally adjusted annual rate of 1,542,000. This is 0.6 percent (±13.3 percent)* below the revised February estimate of 1,552,000, but is 12.9 percent (±18.6 percent)* above the March 2022 rate of 1,366,000. Single‐family housing completions in March were at a rate of 1,050,000; this is 2.4 percent (±12.4 percent)* above the revised February rate of 1,025,000. The March rate for units in buildings with five units or more was 484,000.

As you can see below, completions are like a slow-moving turtle, but they are still rising, so while housing permits are falling, consistent with the housing recession, housing completions are a different story.

Now the data line that excites me the most, of course, is shelter inflation, meaning the growth rate of rent inflation, because it’s cooling down already. This is something I talked about on CNBC last September on the day the CPI report was being reported.

As shelter inflation and wage growth cool down, we are adding more supply, not subtracting. This is key for mortgage rates looking out for years to come. As you can see in the chart below, we have a historic number of 5-unit construction in the works. This is the best way to fight inflation — with supply, with more choices, and landlords having to compete with more supply, preventing them from raising rents faster. The goal should be getting these units out as fast as possible.

One thing that will likely happen soon is that 5-unit builds under construction will start falling, such as we see with single-family homes under construction. With the Federal Reserve wanting a job-loss recession and banking credit getting tighter, apartment construction should fall like it did in the recession of 1974. I just hope it doesn’t collapse down like it did in the recession of 1974. As we can see in the chart below, the single-family units under construction are already falling as they should.

While the housing starts data doesn’t look like too much is happening and still has a recessionary vibe, we have some positive data in these reports.

As the cost to borrowers rises and credit gets tighter, we should be grateful that we have many apartments under construction. Just imagine if rental inflation wasn’t cooling down in real time, and we didn’t have these apartments in the works — it would look like the 1970s again.

That is the last thing the housing market and the U.S. economy need, rent inflation taking off as it did in the mid and late 1970s. This would mean mortgage rates have room to go higher and stay higher.

As you can see in the chart above, after the burst in housing inflation coming from the 1970s, things started to calm down. You can also see why and how inflation wasn’t a problem this century until COVID-19 hit us. That is the history of global pandemics, inflation data gets wild as supply chains are broken, and then things get back to normal over time.

As broader economic events have taken center stage since last summer, the market has grown increasingly volatile. The Federal Reserve’s ongoing war against inflation remains a source of uncertainty for interest rates and for broader financial markets. It has also increased the likelihood of a modest recession later this year.

Although rates have ebbed from over 7% earlier this year to below 6.5% recently, the cost of borrowing is still significantly higher than it was in 2021 or early 2022. This, together with several noteworthy bank failures, dwindling personal savings accounts and increasing debt utilization, has impacted homebuyer demand, which continues to run below both the 15-year highs of 2021 and the pre-pandemic numbers from 2018 and 2019.

This weakness in homebuyer demand and the ongoing purchasing power impact of higher interest rates has also begun to show up in home prices, which are down on a year-to-year basis for the first time in over a decade.

However, many of the homes sold during the past three years were concentrated in higher-priced segments, which exaggerated home price growth as prices were rising and is now exaggerating the declines as sales of multi-million dollar homes begin to normalize.

However, the recent softness in home prices has raised questions about whether this is, “2008 all over again!” But, despite the undeniable shift in the market after running so hot during the pandemic, many of the ingredients needed for a flood of foreclosures or precipitous price declines look much different than they did a decade ago.

Mortgage underwriting standards were much tighter for the past decade than in the era preceding the 2008 financial crisis. The average FICO score for a new mortgage has averaged more than 700 for the past 10 years consecutively.

Inventory was so tight that homes often went to buyers with large down payments or even all-cash offers. The vast majority of new mortgages were fixed rate loans that were originated or refinanced at the lowest rates of all time. And due, at least in part, to this lock-in effect from a predominance of low-rate mortgages, inventory is still very tight and getting tighter each week.

This represents a significant differentiating factor from the last housing cycle. Back when prices were falling by as much as 50% or 60%, California was at nearly 18 months of housing supply as REOs and short-sales flooded the market. In March 2023, it was just 2.2 months of supply, which is the lowest level in roughly 20 years outside of the pandemic housing crunch.

So what does this all mean for housing in 2023 as we move into the home-buying season and second half of the year? We should expect the number of transactions to remain tepid: demand has taken a breather in the face of higher rates and we do not have enough inventory to support a rapid rebound in home sales.

However, the labor market has yet to falter and despite higher interest rates, the level of rates themselves are not particularly high by historical standards. It is likely that the bigger concern moving forward won’t be, “where are the homebuyers?” but rather, “where are the homes to put them in?” Through that lens, the outlook for prices looks much different than it did during the last cycle.

Although prices are expected to remain relatively soft, we’ve already seen the market heat right back up each time rates approach 7% and then fall back down again. It is reasonable to assume that the extremely low inventory that will prevent home sales from bouncing back quickly will also be the primary factor that prevents more significant price declines from materializing this time around.