Housing prices rise despite more supply: Here's why

Anyone out shopping for a home today knows there is still precious little for sale.

The housing market is just beginning to come out of its leanest few years in history. Inventory of both new and existing homes is finally rising, but there is something suddenly strange in the numbers: The supply of newly built homes appears to be way too high.

The numbers, however, are deceiving due to the unprecedented dynamics of today’s housing market, which can be traced back two decades to another unprecedented time in housing, the subprime mortgage boom.

All of it is precisely why home prices, which usually cool off when supply is high, just continue to rise.

The supply scenario

The foundation of today’s tricky numbers

Mortgage rate mayhem

Growth at the low end

On the resale market, the supply is lowest in the $100,000 to $500,000 price tier, according to the National Association of Realtors. That is where the bulk of today’s buyers are. Higher mortgage rates have them seeking cheaper homes.

Interestingly, however, while supply is increasing across all price tiers, it is increasing most in that same lower-end price tier, meaning it is simply not enough. As fast as the homes are coming on the market, they are going under contract.

For example, there is just a 2.7-month supply of homes for sale between $100,000 and $250,000, but supply is up 19% from a year ago. Meanwhile, there is a 4.2-month supply of homes priced upward of $1 million, but supply is up just 5% from a year ago.

This explains why home prices remain stubbornly high, even with improving supply. Prices in May, the latest reading, were 4.9% higher than May 2023, according to CoreLogic. The gains have begun to shrink slightly, but not everywhere.

“Persistently stronger home price gains this spring continue in markets where inventory is well below pre-pandemic levels, such as those in the Northeast,” said Selma Hepp, chief economist for CoreLogic.

“Also, markets that are relatively more affordable, such as those in the Midwest, have seen healthy price growth this spring.”

Hepp notes that Florida and Texas, which are seeing comparatively larger growth in the supply of homes for sale, are now seeing prices below where they were a year ago.

While analysts have expected prices to ease and mortgage rates to come down in the second half of this year, it remains to be seen if rates will actually come down and if the supply-demand imbalance will allow prices to cool. If mortgage rates do come down, demand will surely surge, putting even more pressure on supply and keeping prices elevated.

“Yes, inventory is rising and will continue to rise, particularly as the mortgage rate lock-in effect diminishes in the quarters ahead. But current inventory levels continue to support, on a national basis, new construction and some price growth,” Dietz added.

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