The U.S. real estate market has recently introduced a significant number of housing options, yet the housing prices have not declined as expected.

Combining data from the U.S. Census Bureau and the National Association of Realtors (NAR), the inventory of new homes in the United States has reached its highest level since the housing market crash following the subprime mortgage crisis in 2008, and the supply of existing homes has also reached its highest in nearly four years.

According to data from the U.S. Department of Housing and Urban Development (HUD), the supply of new and existing homes has been on an upward trend, with the inventory reaching 4.7 months in June, the highest since June 2016. In other words, at the current sales pace, it would take 4.7 months to sell all available housing options.

However, at the same time, housing prices have not fallen as anticipated. The latest data from the U.S. Census Bureau shows that the median price of new homes has reached $417,000, a month-on-month increase of 2.5%, and is flat year-on-year; the median price of existing homes has risen by 2.3% month-on-month, reaching a record high of $427,000, with a year-on-year increase of 4.1%.

Why is this the case?

During the pandemic, surging demand led to the supply of available homes on the U.S. real estate market plummeting to a historic low, only sufficient for two months of sales. Now, with housing prices and interest rates remaining high, the supply is finally beginning to rebound. According to HUD data, at the current sales pace, it would take 9.3 months to sell the supply of newly built homes, while the supply of existing homes could last for 4.1 months.

Advertisement

This indicates that the relaxation of supply and demand primarily occurs in the new homes market, not in the existing homes market. Data from the National Association of Home Builders (NAHB) shows that historically, the supply of new and existing homes is usually very close. Currently, newly built homes account for 30% of the total inventory, which is about double their historical share.

This unusual supply gap is believed to be caused by the significant fluctuations in mortgage interest rates in recent years. Data from Freddie Mac shows that in 2021, the average interest rate for a 30-year fixed-rate mortgage in the United States fell to a low of 2.65%, reached a historical high of 7.76% in November 2023, and is currently at 6.78%.

Chen Hongming, Deputy General Manager of Evergreen Properties in Washington, D.C., told Yicai Global that this "interest rate lock-in effect" prevents many people who want to change homes from doing so, as it means they would have to give up interest rates of 3% to 4% and bear interest rates of 7%, leading to a significant increase in monthly mortgage payments.However, in the new housing market with a more relaxed supply, the price increase is indeed not as strong as in the existing housing market. Nancy Vanden Houten, a senior economist at Oxford Economics, stated that new home prices have been flat for over a year, with June's prices being on par with last year, while existing home prices have risen by 4.1% year-over-year.

Looking at a more detailed price level, data from the National Association of Realtors (NAR) shows that in the existing home resale market, the supply of homes in the most favored price range of $100,000 to $500,000 by buyers is the least. Due to high mortgage interest rates, these sellers are starting to look for homes at the lower end of this price range, and the increase in supply cannot meet the demand.

NAR data indicates that the supply of homes for sale between $100,000 and $250,000 has increased by 19%, but the supply is only 2.7 months; the supply of homes priced above $1 million has only increased by 5% compared to a year ago, but the supply is 4.2 months. In other words, the competition for lower-priced homes remains very intense, and even if there are homes entering the market, they will be quickly snapped up. The shortage of supply leads to fierce competition among buyers, thereby driving up housing prices.

Chen Hongming also said: "Although the number of homes listed for sale has increased, sales are also increasing, with both buyers and sellers growing. The average time a home stays on the market has actually decreased by 7%, which represents that the current balance of supply and demand still leans more towards a seller's market."

According to data from the real estate brokerage Redfin, in June, more than one-third of home sales still exceeded the listed price.

Chen Hongming believes that when the mortgage interest rate rises from 3% to 7%, many buyers do indeed hesitate, thus delaying their purchasing decisions. "But now, because high interest rates have been maintained for a while, buyers have started to get used to the interest rate level of around 7%, so some of the buyers with urgent needs who postponed their purchases will start to enter the market. Sellers also know that high interest rates are likely to remain fixed for a while, so they are now starting to put their properties up for sale," he said.

What is the trend for housing prices in the second half of the year?

Under the record high housing prices and high mortgage interest rates, the recent sales volume of new homes and existing homes in the United States have not met expectations. The U.S. Census Bureau and NAR reported that new home sales in June decreased by 0.6%, and existing home sales decreased by 5.4%, which is also the fourth consecutive month of decline in existing home sales.

Lawrence Yun, Chief Economist at NAR, said: "We are seeing more inventory, but we are not seeing an increase in sales volume. We may be moving from a seller's market to a balanced market, and we may be entering a buyer's market."Chen Hongming stated: "Currently, the bidding for purchasing homes is not as severe as before; it usually occurs with more unique properties. The listed prices in the market now are also closer to the actual sales prices."

Looking forward to the U.S. real estate market in the second half of the year, Chen Hongming believes that buyers and sellers are beginning to return to the market, and if the Federal Reserve takes any rate-cutting actions, it would be a plus for the market.

Haoden also anticipates that with the Federal Reserve starting to lower interest rates, mortgage rates will further decrease in the near future. An increase in supply may support sales and could lead to a slight softening of housing prices.

"However, even with the decrease in interest rates, the current level of housing prices will make it difficult for many potential homebuyers to purchase homes," she said. "According to our latest updated (U.S.) Housing Affordability Index, existing housing prices and high mortgage rates have pushed home affordability to a historical low. Nevertheless, we do not expect a sharp drop in housing prices. The market supply remains relatively tight. The decrease in mortgage rates and the softening of prices will both lead to a rebound in demand."

However, whether the supply of new homes will maintain the current growth rate remains to be seen. Stanley, Chief U.S. Economist at Santander Capital Markets, believes that builders hope to see strong demand, but rising housing prices and the rebound in mortgage rates have hurt buyers' affordability, and the demand for home purchases is beginning to deteriorate. With such a high level of supply, builders may continue to slow down. The number of new starts for single-family homes has declined for four consecutive months, marking the longest continuous period since 2018.