Existing Home Market for Month Ended February 2023: Sales Up 15% Over Prior Month

The number of existing home sales increased as mortgage rates decreased between December and February. However, the supply of homes for sale remains very low. The spike in home sales during COVID, combined with record low mortgage rates, brought forward demand, with many buyers purchasing a home, thereby reducing current period demand.

Existing homes for sale follow a seasonal pattern, with December being the low point of the year. Homes for sale have been decreasing since 2011 and reached a low point as the COVID pandemic subsided and mortgage rates hit record lows before the Fed increased interest rates in April 2022, in response to rising inflationary concerns. Potential sellers who have low mortgage rates are motivated to hold onto them.

Existing homes: months of inventory remain near record lows but have started to increase. The pending home sales index has materially decreased over the past 9 months, initially due to a lack of homes for sale, and now due to rising mortgage rates and home prices, but has picked up over the last 2 months.

Prior to COVID, the Days on Market (DOM – the blue line) had been gradually decreasing. After COVID, the days on the market reached record lows and are now at 34 days as of February 2023. 57% of all properties sell within ONE MONTH (the red line).

Mortgage rates are now well above 5.00% (red bars). In late 2022, rates decreased slightly, and home sales picked up. Home prices, indicated by the dashed green line, have continued to rise, even with mortgage rates rising. This has occurred in the past when rates rose – future near-term homebuyers rushed into the market to buy before mortgage rates rose further. Now that they are gone, home prices have started to decline. Higher-end home sales have moderated.

The median home price for all regions accelerated in early 2022 just as mortgage rates rose and demand surged. It is worth noting that there was a decline in July and August, but the price increased again in February due to the modest mortgage rate decreases in late 2022.

The National Association of Realtors’ Pending Sales Index has been declining from its record highs, with substantial declines noted in the South and West regions. The declines are due to a combination of factors: 1. Higher mortgage rates (although mortgage rates decreased in late 2022 and pending sales increased), 2. Higher home prices, and 3. Relatively few homes for sale.

Distressed-related home sales remain at record low levels. With recent home price appreciation, distressed homeowners will be able to sell without sustaining equity losses due to foreclosures. First-time homebuyers have decreased as mortgage rates and home prices have increased. Record low mortgage rates previously allowed for 5 times income ratios; the ratio now is 3.6 based on 6.83%, representing a ~25% decrease in purchasing power. All-cash purchases have increased, even though investor purchases have been flat.

Bill Knudson, Research Analyst LANDCO ARESC