For many, peanut butter is a delectable treat that is wonderful on crackers, toast, bananas, celery and an incredible additional ingredient in chocolate and cookies. The jar often gets to a point where it necessitates scraping the bottom for every last morsel. When it is this low, it is just a matter of time before everything changes; a new jar is opened, and there is plenty of peanut butter to dip into. Housing is just like that peanut bar jar. The supply of available homes, the number of homeowners willing to sell, and buyer demand are all very low, scraping the bottom compared to normal levels before COVID and sky-high mortgage rates. The current trend lines for these metrics cannot get much lower than where they are today. They have been at these low levels all year. It is just a matter of time before they start to rise from this established bottom. In October and November of last year, mortgage rates eclipsed 7% for the first time since 2001. They had risen from 3.25% in January 2022 to 7.37% at the end of October, drastically higher in a very short period. The quick erosion in affordability slammed on the brakes of a nuclear-hot housing market. Demand hit a March peak 18% below the average peak for 2020 and 2021. It was 9% below the 3-year average peak in demand before COVID (2017 to 2019). Before homeowners were able to adjust to the much lower demand levels, the inventory climbed from historical lows in January, with only 4,732 homes during the first week, to a peak of 11,112 in August, a 135% rise. It was 28% higher than 2021’s peak at 8,702 homes. Yet, it was still 20% below the 3-year average inventory peak before COVID of 13,909.
Demand in 2023 has been subdued all year due to the high mortgage rate environment and the lack of homeowners willing to sell. Demand has remained relatively flat, at bare-bones, inherent levels. There are always buyers in every market regardless of where rates climb. Year-over-year numbers have been nearly identical for the past month. This year’s inventory has also remained relatively flat, dropping by 14% from January through April, when it usually rises. From there, it slowly climbed and did not peak until the beginning of this month at 9,053 homes, only 14% above the start of this year. Year over year, there are a lot fewer homes on the market, bare-bones, inherent levels. Like demand, there are always sellers in every market regardless of underlying fundamentals. Another restrained statistic is the number of homeowners willing to sell. According to the Federal Housing Finance Agency’s National Mortgage Database, 85% of Californians with a mortgage have a rate of 5% or lower, 69% are at 4% or lower, and 30% are at 3% or lower. Consequently, fewer homeowners are selling their homes in the current high-rate environment. From January through October, 53,363 new sellers entered the market in Los Angeles County, 28,300 fewer than the 3-year average before COVID, 35% less. Last year, there were 16% fewer sellers compared to the average. Yet, year-over-year comparisons were almost identical in October, with 5,593 sellers this year compared to 5,611 last year. Rates were above 7% both this year and last.
Annual comparisons will finally tell a story from this point forward. Housing is scraping the
bottom in the number of homes available, buyer demand, and the number of homeowners
willing to sell. Any rise in any of these metrics will provide quick insight into the housing
market's direction. The economy is anticipated to cool a bit in 2024 from its hotter pace
this year. For investors, a cooler economy typically means a flight to safe, long-term
investments, 10-year bonds, and mortgage-backed securities. This flight to safety results in
mortgage rates falling. As rates fall, demand will rise. If rates fall enough, more
homeowners will be willing to sell. It is just a matter of time before something finally
changes, and there will be more activity in housing. It will not bounce along the bottom
forever. A new jar of peanut butter will be opened.
