Bad News for Home Sellers May Be Good News for Buyers
KEY POINTS
- Rising inventory may be good news for home buyers.
- Thanks to high home prices and uncomfortable interest rates, competition for housing in parts of the U.S. has slowed.
- Whether the market changes due to an increase in inventory or a lower level of competition, home sellers should be ready to compromise.
During the early days of the pandemic, it became clear that something odd was going on with the housing market. To keep the economy chugging along, the Federal Reserve dropped the federal funds rate to historic lows, and buyers came out in droves to take advantage of the lower mortgage rates that resulted in part from this action. All those buyers competing for a limited number of homes on the market drove prices into the stratosphere.
Although we knew enough to expect a correction, there was no way to know when that would happen. It took years, but lately, we've begun to see signs of a softening market and greater potential for buyers to regain a measure of control. Home sellers may want to brace themselves for a slowly normalizing market in many areas of the country.
Two realities
What makes the situation so tricky to navigate is that we're facing two competing realities.
- The Federal Reserve Bank of St. Louis reports that the median price of a home this summer is $412,300. However, according to the National Association of Home Builders (NAHB), 49% of households do not earn enough money to afford a $250,000 home, much less a home selling for more than $400,000.
- The number of homes on the market across the U.S. has grown. As homes remain on the market for longer, competition has slowed.
So, here's where we stand: Homes remain impossibly expensive for a large portion of the American population, but fewer people are competing to buy a home (which is good news for buyers).
How a decrease in competition plays out for buyers and sellers
While homes were snapped up within hours of hitting the market during the height of the pandemic, by early this summer, the situation had changed. Nearly 70% of U.S. counties studied experienced an increase in inventory last year.
Between May 2023 and May 2024, 16% more homes were available to purchase. That's still less than was available in May 2019 (before the pandemic), but an improvement nonetheless.
With less competition for homes in play, properties have remained on the market longer. The longer a house is on the market, the better the chances are that a seller will be forced to accept sales contingencies.
During periods of high competition, home buyers are more likely to skip contingencies. For example, if they're afraid another buyer will beat them out, they may waive a home inspection to make their offer more appealing.
As competition wanes, sellers who are anxious to move on may have no choice but to agree to a buyer's terms. Home buyers have not enjoyed this scenario for years.
What about home prices?
As mentioned, home prices remain out of reach for millions of potential buyers, but that could change. As Lawrence Yun, chief economist with the National Association of Realtors (NAR), recently told NBC News, "Inventory has certainly increased, but sales have yet to really get going. So if inventory lingers for longer, that's when we'll really start to see price reductions."
We may be unable to predict when getting a new mortgage will become more affordable. However, based on the history of home sales in the U.S., we know that the following factors play a role. As each factor comes into play, we can expect the market to soften.
Inventory
Home prices rose dramatically during the pandemic, in part due to low inventory. As more properties hit the market, sellers who want out will have to compromise on everything, from price to contingencies.
Interest rates
There's nothing like a global pandemic to heat up inflation. In an effort to cool it back down, the Federal Reserve raised the federal funds rate. With a current rate of inflation under 3%, the Fed is once again intending to lower it. This is likely to impact mortgage rates, too, and potential home sellers who've wanted to move may be more amenable to doing so. As their properties are listed for sale, we can expect prices to decrease.
More available properties
Another way more homes may flood the market is through government intervention. For example, the Biden-Harris administration recently announced funding for communities to build more affordable homes. The goal is to lower housing costs by giving buyers more homes to choose from.
According to the U.S. Department of Housing and Urban Development (HUD), $100 million in competitive grant funding is now available to help builders cut red tape, build more homes, and lower the cost of both renting and buying.
There's no sugarcoating the fact that it remains a challenging market for many home buyers. However, Lawrence Yun told NBC News that he sees hope ahead.
As inventory increases across the country, homeowners will be less tethered to the homes they currently own. More homes on the market equals more opportunity for buyers to find housing they can afford and climb back into the driver's seat to negotiate purchase offers.
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