Higher Inventory = Lower Home Prices in 2023
Inventory is surging right now across many US Housing Markets. Cities such as Phoenix, Raleigh, and Nashville have experienced nearly a TRIPLING (3x) in Homes For Sale. But despite this surge in Inventory, Home Prices in these markets are not going down as fast many would like.
What gives? Why is there a lag between Inventory gains and Price Declines? And when will we start to see the 20, 30, and 40% price declines necessary to restore affordability to the US Housing Market?
First things first. Let's understand which markets are seeing the biggest increase in inventory (aka Homes for Sale). The list below was gathered from Realtor.com and shows that metros across Utah, Texas, Arizona, and Florida are among the leaders in inventory gains.
Ogden, UT, situated just north of Salt Lake City, clocks in at #1, with a juicy +237% Increase in Inventory. Meaning that the number of homes on the market in Ogden has more than tripled in a year, increasing from 519 to 1,616 (Nov 2021-22).
Another market with a big increase inventory is Nashville, TN. Homes for Sale in the Music City jumped from 2,578 in November 2021 to 7,289 this year, an astounding +183% (nearly a three-fold increase). Phoenix, Austin, Salt Lake, Tampa, Dallas, and Seattle are other metros with surging inventory levels.
These surging inventory levels are the combination of two simple factors: 1) a decline in buyers and 2) an increase in sellers. Resulting in a big shift in demand/supply fundamentals that leaves more homes sitting in inventory on the market.
Increasing Inventory = Lower Home Prices, Right?
As more homes sit on the market, logic says that prices should decline. And no doubt, that is what is happening. The Case Shiller Home Price Index has reported a 3% decline in prices nationally since June. Metros like Seattle are down 11%.Redfin is reporting that the Median Sale Price in Austin is down 18% (see Tweet below).
However, I suspect a 3% decline nationally or even an 18% decline in Austin is of little consolation to someone trying to buy at 7% Mortgage Rates right now. Prices need to go down by a lot more to restore affordability to the Housing Market.
Fortunately, surging Inventory across much of the US Housing Market suggests that prices will continue to drop. That's because there is a "Lag Effect" between Inventory and Price Levels, where today's Inventory Levels will predict tomorrow's Home Prices.
Why is there a Lag Effect? Well, think of it this way: Inventory is the real-time gauge of demand/supply dynamics in a local Housing Market. If demand outstrips supply, inventory goes down immediately. If supply outstrips demand, inventory goes up immediately. Realtors are aware of these shifts as they happen. Data watchers like myself are aware of these shifts as they happen.
But quite often, sellers are ignorant of what's happening with inventory. Rather, they are concerned with maximizing value for themselves. The result is that there is a time delay, on the order of 12-18 Months, between big shifts in Inventory and big shifts in prices.
To understand the Lag Effect better, let's compare Inventory Levels to Home Price Growth in Austin, TX.
Inventory, the orange line, began declining in late 2019/early 2020. Then once the pandemic hit inventory dropped precipitously, down to 1,396 homes on the market in February 2021.
Note how the blue line, Price Growth YoY, was slow to react at first. As inventory plummeted in 2020, price appreciation inched up from its normal levels of +5% to double-digits by the end of the year. It wasn't really until mid-2021 that price growth started exploding. And it wasn't until January 2022 that price growth peaked.
That peak in price growth occurred two years AFTER inventory began its initial descent in Austin. Highlighting the Lag Effect inherent between Inventory and Prices.
Stubborn Sellers will be Very Upset in 2023
But now Inventory in Austin, and many other parts of America, has exploded. And the result is that Home Prices are going down. But they're not going down fast enough to entice buyers back into the market.
For instance, while Redfin's Median Sale Price in Austin has declined by -18% from May, it's still only down -2% YoY. Meanwhile, Zillow shows Austin as up +2% YoY. Why is this the case?
Because sellers across America's Housing Market are Stubborn. They're still living in the world of 2021 where they saw their neighbor sell their house at a max price. These sellers aren't really paying attention to the Inventory figures. They're not thinking about the imminent Recession warning signs for 2023. And most importantly, they have an emotional attachment to their house.
As a result, they tell their realtor to price the house at a value that is still way too high given Mortgage Rates and the slowing Economy. The Sellers think that somehow, magically, the market will bounce back in the Spring. And this Seller stubbornness is what creates the Lag Effect on the way down in the market.
A Lag Effect that is very apparent in a market like Nashville, TN right now. Inventory has exploded, but price growth peaked in April 2022 and is still registering a hefty +17% YoY Growth Rate. While that growth has slowed considerably in recent months, it's still well in positive territory, indicating that prices in Nashville are still way too high.
But this situation won't last forever. As 2022 draws to a close and the 2023 Housing Market takes hold, sellers in Nashville will start to wake up to the realities of Inventory and cut prices.
Inventory will keep Increasing in 2023
Another thing to remember is that the Inventory gains in the US Housing Market in 2022 were likely just the start of a multi-year trend of higher inventory. As we progress further in 2023, we'll see more housing completions, declining rents, and increasing foreclosures. Trends that will structurally add more inventory to the US Housing Market for the long term. And "lock-in" the declining price environment that started in the second half of 2022.
Higher inventory in 2023 will be welcome news for the entire US Housing Market. But especially for inventory-constrained cities across the Northeast and Midwest. These areas have yet to experience a surge in Inventory.
In fact, markets like Chicago, IL, Albany, NY, and New York, NY are still experiencing declining YoY Inventory Levels. Meanwhile, New Haven, Minneapolis, and Trenton are only slightly up on Inventory. It will take a Recession and the "forced sales" to sizably increase Inventory in these Housing Markets.
And that Recession is coming (or it's already here, depending on who you ask). The biggest Yield Curve Inversion in history suggests that 2023 will be a year of economic weakness. Expect the Unemployment Rate to spike. Deflationary forces to hit the economy. And Wall Street Investors to get flushed out of the Housing Market.
Which means more Inventory. And Lower Prices. If you're someone who has been waiting to buy for a while: stay patient.
Your time is coming.
Update on Reventure App
Lastly - I wanted to provide you all with a quick update on Reventure App.
My Channel Members from YouTube are currently beta-testing the App. We're taking the feedback from this beta testing and using it to improve the final version, which will be ready for release in early February.
Upon its launch, Reventure App will enable you to perform all types of different analyses on the US Housing Market. For instance, you will be able to filter the Metros with the biggest surge in Inventory YoY.
You can see that they are predominantly located on the West Coast of the US, Mountain Regions, Texas, and Florida. Moreover, you can get even more granular and see the ZIP Codes where Inventory is increasing most in your metro.
These insights from Reventure App will allow you to view curated lists for the cities and ZIP Codes where home prices are predicted to go down most in the next 12-24 Months. And to understand whether your neighborhood is a good or bad place to buy right now.
I will be sending out some Reventure App-specific updates in the next several weeks with some demos on how to use the tool. If you want to receive those, make sure you're signed up for the waiting list (click below).
Talk to you all soon.