Housing Inventory DROPS as Cash Buyers Return

Realtor.com just released February 2023 Inventory figures for the US Housing Market. And on initial inspection they're...confusing. Because even though leading indicators of buyer demand collapsed in February, home sales actually went up. Which caused inventory to go down.

Specifically: the number of Active Listings on the market declined to 578k homes. This inventory level is down 23% from Oct 2022. And it's down 38% from pre-pandemic levels. Meaning that inventory is still "low" at the national level.

On the positive side - inventory is up year-over-year. And up significantly. Active Listings are 68% higher than they were in February 2022. Indicating that homebuyers are in a much better position heading into the spring selling season in 2023.

But the position of regular homebuyers is complicated by the re-entry of cash buyers back into the US Housing Market.

Cash Buyers Pushing Out Mortgage Buyers?

One way we know that cash buyers are returning to the US Housing Market is because of the differential between pending home sales and mortgage applications.

Generally, these two data points move together, since mortgages facilitate over 70% of the sales in the US Housing Market. And sure enough, over the last 18 months, the decline in pending sales (orange line) largey mirrored the decline in mortgage applications (blue line).

That is, until the last two months.

You can see that starting in January, and then accelerating in February, pending home sales "improved" to a -25% decline YoY. Which is still bad. Just not as bad.

Suggesting that more buyers came back into the market. But these buyers weren't using a traditional mortgage. As the mortgage applications to buy a house in February were still down -38% YoY. Near the lowest levels of all-time and a continuation of the mortgage collapse I discussed two weeks ago.

If these buyers weren't using a traditional mortgage, what were they doing? Well, they were using cash!

Wall Street Landlords, Flippers, and 2nd Home Buyers are to Blame

Who are these cash buyers that re-entered the market in February and caused inventory to decline? Based on my discussions with contacts in the housing industry, it breaks down as follows:

1. Wall Street Landlords

A handful of Wall Street Landlords came off the sidelines and starting buying homes again. Not as much as they did in peak pandemic, but an increase from the end of 2022. Big companies like Invitation Homes, Progress Residential, and Amherst Holdings to name a few.

Both Progress and Amherst had fairly sizable Mortgage Backed Security ("MBS") issuances in February. Which likely drove their appetite to buy homes.

However, their interest rate on those MBS issuances was 5.74% and 6.41%, respectively. Meaning that these Wall Street Landlords are likely losing money on their rental properties after paying the MBS debt service.

As I've said many times here and on YouTube the last several months: the economics of owning real estate rentals does not make sense in the current interest rate environment. Which is why I suspect the uptick in Wall Street buying to start 2023 will be short-lived.

2. iBuyers Making a Return

In a desperate attempt to validate their existence, iBuyers such as Opendoor and Offerpad have ramped up their home purchases to begin 2023. Opendoor in particular is getting aggressive, buying up homes and in some cases marking them up on resale.

These iBuyers can increase pending sales, and temporarily deplete for sale inventory, when there's a sudden burst of acquisitions. Which is what I believe is happening right now.

However, they won't reduce inventory levels long-term. That's because the homes they are buying today will be re-listed for sale in 1-2 months, increasing inventory in future months.

Moreover, I don't believe these iBuyers will be around for much longer. Offerpad's stock is trading for $0.63/share. Opendoor is at $1.56/share. Bankruptcy for these two could come later in 2023, in which case they would need to liquidate their portfolios. Which would increase inventory and push down prices in the market where they are most active.

3. Wealthy 2nd Homebuyers Making a Splash

I don't have much data to validate this one. But based on the comments I'm seeing from you here and on YouTube, it seems like there's been an uptick in wealthy cash buyers purchasing 2nd homes to start the year.

January and February is the typical time of year when wealthy families from New York, Illinois, and Canada head down south to purchase their winter homes.

Perhaps some of that is also driving the improvement in pending sales and depletion of inventory we saw in February.

Fundamental Home-Buying Demand down 45% YoY

Meanwhile - the demand from fundamental, end-user homebuyers has tanked over the last month as mortgage rates have risen. Evidenced by Mortgage applications, which had a slight revival in mid-January, collapsing over the last several weeks. The current index level of 139 is down:

• -25% month-over-month
• -45% year-over-year
• -52% from two years ago (2021)
• -45% from pre-pademic level (2019)

The mortgage application data is typically a "leading indicator". Meaning that changes today will impact sales and inventory volume in 1-2 months time. Suggesting that the rapid decline in applications over the last several weeks will cause March's inventory figures to go up.

Again - the mortgage application data is telling you what's going on with the regular homebuyer. And the data is very clear that the regular homebuyer is gone from the US Housing Market. And won't be coming back until both prices and mortgage rates decline.

Sellers still hesitant to List their Houses

Another complicating factor for inventory is that seller morale is at very low levels in 2023. And as a result the number of "new listings" coming to the market each month is down significantly.

According to Redfin, new seller listings in February were down -21% from the their levels last year. Which, combined with an uptick in pending sales from cash buyers, caused inventory to drop.

Why aren't sellers listing? I think it's mainly driven by negative sentiment on the Housing Market. Would-be sellers know it's a tough market out there, and that their house will likely sit for months before selling. And that it will require price cuts. And maybe some buyers falling out of contract before finding one who sticks.

That's an arduous prospect. And for those sellers who don't have "pressure" to sell through a mortgage default or layoff, they might just be content on holding their property and waiting until things get better.

The issue is that things are unlikely to get better. And the longer sellers wait, the more they're running the risk of eventually being forced to list in a worsening Housing Market and Recession.

Reason #2: Sellers won't list because they have 3% Mortgage Rates

Another common argument I hear is that sellers aren't listing their houses because many have 3% Mortgage Rates and thus don't want to give that up for a 7% Mortgage Rate.  

According to Fannie Mae, as of Q3 2022, the breakdown of interest rates for mortgage holders in America was as follows:

• 24% had a Mortgage Rate below 3%
• 40% had a Mortgage Rate between 3-4%
• 21% had a Mortgage Rate between 4-5%
• 15% had a Mortgage Rate above 5%

Over half of mortgage holders in America have a rate below 4%. So clearly there is some truth to the idea that the differential between the locked-in rates and the prevailing market rates is suppressing new listings.

However, those who make this argument often miss a key point. And that's there's no net impact to inventory from a homeowner staying in their house because of a low mortgage rate.

Yes, it means they won't list their house. But it also means they won't buy a new house. So it's a wash in terms of what happens to the inventory balance in the housing market (although there might be an impact on the mix of homes that end up on the market).

Pay attention to Canada's Housing Market

Another point to consider in this discussion of mortgage rates and seller listings is what's occurring in Canada's Housing Market.

According to TD Bank, Canada is also suffering from a shortage of new seller listings in early 2023.

What's interesting about this is that Canada's mortgage market is very different than America's. Nearly half of mortgages in Canada are variable-rate. Meaning that when the Bank of Canada hikes rates, it immediately causes the payments of half of Canada's homeowners to increase.

So mortgage holders in Canada do not have the same benefit of having locked in a low mortgage rate. And they have a big monetary incentive to sell when rates go up. But despite that, sellers in Canada are just as hesitant to list as those in America.

This suggests that the new listing shortage is being primarily driven by market sentiment (aka, not wanting to list in a down market).

"Forced Selling" will cure the New Listing Shortage

The new listing shortage will be alleviated once there is more pressure on sellers to list. This "Forced Selling" can come through a variety of mechanisms, including:

1. Layoffs
2. Perception that Home Prices will keep declining
3. Mortgage Defaults

A market like Austin, TX is currently dealing with the first two. Right now in Austin the layoffs from companies like Dell, Tesla, Oracle, and Facebook has created a situation where certain sellers are forced to sell. Which has caused new listings to keep flowing onto the market. Which has caused prices to keep going down (-15% from peak depending on the source).

Those price declines have morphed into the perception that prices will keep falling. Which has destroyed the notion among sellers that it's better to "wait it out". Which keeps the listings flowing onto the market even though buyer demand is down 30% YoY.

Note that Austin has a very high percentage of mortgage holders with a rate under 4%. And theoretically should have owners who are willing to hold out, with minimal pressure to list. But the layoffs and dramatic price declines have clearly destroyed the financial advantage that owners thought they had due to having a low rate.

Austin's case is a good lesson to the rest of America of what will happen to the Housing Market when the unemployment rate increases more broadly.

(Another thing to note about Austin is that the mortgage default and foreclosure rate is still low. Evidence that a big uptick in foreclosures is not necessary to cause a price crash and surge in inventory.)

Inventory Predictions for Spring 2023

So how will all of these factors impact inventory on the US Housing Market in March/April/May? What should you expect as a homebuyer or real estate investor?

Well, based on the increase in cash buyers, dramatic collapse in mortgage buyers, and decline in new listings, I'm projecting inventory to be flat in March. Just like it was one year ago in March 2022. But then starting in April I suspect inventory will begin increasing. Like it does every spring.

And perhaps we have a repeat of 2022, where inventory gains by May reached +100k in a month. And stayed that way through the summer. Or perhaps it's a more typical spring inventory increase where we see monthly gains around +50k.

A lot will depend on how the trajectory of cash buyers, mortgage demand, and new listings trend in future months. However, I will tell you one thing I'm confident in: mortgage demand will not be coming back with where prices and rates are right now.

Collapsed mortgage demand means 70% of homebuyer demand is on ice. The remaining 30% who are cash buyers will be forced to support the market. Just as we're likely to see more people laid off and be pushed into a forced selling situation.

Watch out for February Inventory data from Realtor.com to be updated on the Reventure App this week.

Until then, make sure to familiarize yourself with the January inventory trends. Particularly the YoY Growth Rate. Note a market like Dallas, TX, which is up 199% compared to least year. Which means 3x more homes on the market.

Also make sure to check out historical For Sale Inventory in the graph functionality on the App. This gives a good historical perspective on if inventory is high, normal, or low. In Dallas it's back to normal.

And above all - please comment below and let me know what you're seeing in your local housing market! Especially in regards to inventory.

-Nick