Rising Home Supply Will Hamper Inflation

Rising Home Supply Will Hamper Inflation

• The number of existing homes increased to 1.54 million in May.
• That equals 4.6 months’ worth of supply.
• The change is causing price growth to keep slowing.

The housing market boom increasingly looks over…

One of my starkest memories of the COVID pandemic was the housing market seesaw. At the onset, it looked like home buying was headed for the dumps. Consumer uncertainty jumped as government entities and businesses asked employees to remain at home. And with households having to arrest their daily habits, the economy looked like it could go bust. So, companies went into cost-cutting mode and started laying off workers.

In April 2020, the number of unemployed people exploded to almost 23.1 million, compared to 7.2 million the month prior. The last thing anyone wanted to do was purchase a home. Between February and May, the annualized pace of existing home sales plummeted from 5.6 million to 4.1 million…

Yet, just as suddenly as a collapse looked imminent, everything changed. Businesses and employees quickly realized that cloud computing meant they could work from anywhere. No longer did they have to be fettered to a desk or a cubicle to execute a business plan—sales could happen from anywhere. And due to super-low interest rates, the change meant no town was safe from the coming demand for affordable housing.

By January 2021, existing home sales had shot up to an annualized pace of 6.6 million. Inventory dwindled and prices took off. Towns like Boise, Idaho, and Austin, Texas, became the epicenter of the rush. Roughly one year later, prices had risen more than 40%, causing domestic inflation to skyrocket and forcing our central bank to act. Over the next 17 months, the Fed raised interest rates by 525 basis points, pushing the annualized pace of existing home sales to just under 3.9 million.

Now, while rates have eased somewhat, existing home sales haven’t recovered. In fact, based on the most recent data from the National Association of Realtors (“NAR”), inventory has risen above pre-pandemic levels. The change should weigh on prices and put a lid on inflation growth. It should also give our central bank room to start cutting interest rates once more, underpinning a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Every month, the NAR releases a slew of housing data, like the existing home sales figures above. By analyzing the numbers, we can get a sense of what's happening in every region across the country. But let's focus on a few key national indicators to get a bigger picture and compare the current market to recent trends.

Existing homes are particularly important because they typically make up 85% to 90% of total home sales each year. As a result, they serve as a strong indicator of overall market activity and price trends. Based on the May data, inventory is on the rise…

The chart above measures the number of available homes in terms of months' supply—essentially, how long it would take to sell all the houses currently on the market. In May, inventory reached 4.6 months, marking the highest level in over seven years. While this brings supply back to historical norms, it also means buyers can afford to be more selective.

Now look at what the shift has meant for listing prices…

According to property listing website Realtor.com, the median listing price per square foot was $234 in May compared to $233 a year ago. That means the pace of year-over-year increase was just 0.4% this past month compared to 1.3% in April and 23% back in May 2021. The pace of annualized growth hasn’t been this weak since the Fed was raising interest rates.

And it’s a similar story for house price growth…

According to the NAR, the median existing home sales price in May was just under $423,000. That’s an increase of 1.3% year-over-year compared to 1.8% last month and over 25% in May 2021. In fact, this past month experienced the weakest pace of growth since early 2023, before the Federal Reserve signaled its intent to lower interest rates again.

So, as I said at the start, housing inventory is climbing, and the shift is placing downward pressure on price growth. The likely culprit is the central bank's reluctance to lower rates further. And with the onset of summer, homes will become more difficult to sell.

Housing prices account for roughly 35% of the U.S. Bureau of Labor Statistics’ Consumer Price Index and 17% of the U.S. Bureau of Economic Analysis’ Personal Consumption Expenditures. In other words, swelling supply should keep a lid on inflation growth in the coming months, increasing the likelihood of future rate cuts. That will support a steady rally in the S&P 500.

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