Months-of-Supply and Future Trends

U.S. Housing Market Overview – Analyzing Months-of-Supply and Future Trends

The U.S. housing market in 2024 is facing a combination of challenges: low inventory levels, high mortgage rates, and reduced sales activity. One of the most critical indicators of housing market health is months-of-supply—a metric that gauges how long it would take to sell the current inventory of homes at the current rate of sales. Historically, when months-of-supply exceeds six months, it signals a buyer’s market, where home prices tend to decline. Conversely, a low months-of-supply points to a seller’s market, where competition for limited inventory drives up prices.

In August 2024, the months-of-supply was reported at 4.2 months, reflecting a shift back to pre-pandemic levels and signaling a market cooling from the record-low inventory seen over the past few years. But what does this mean for buyers, sellers, and investors in the coming months?

The Current State of Months-of-Supply

The months-of-supply figure in August 2024 of 4.2 months is notable for several reasons:

Above 2021-2023 levels: During the pandemic, months-of-supply dropped below 3 months, contributing to a massive seller’s market, with homes selling rapidly and prices skyrocketing.
Returning to Pre-Pandemic Norms: In August 2019, the months-of-supply was around 4.0 months, very close to where it stands today, suggesting the market is stabilizing after years of imbalance.

The primary reason for this is a decline in both inventory and sales. Inventory is down significantly compared to pre-pandemic levels, yet sales have fallen even more. This imbalance is pushing up months-of-supply, but not enough to signal a buyer’s market yet. If current trends continue, experts predict it could take until mid-2024 to see a substantial shift.

How Sales and Inventory Impact the Market

The months-of-supply metric is particularly important when assessing the potential for future price movements. In August 2024:

Inventory levels: At the end of the month, the number of homes available for sale stood at a modest 1.2 million units, down from pre-pandemic norms of 1.6 to 1.7 million units.
Sales volumes: Meanwhile, existing home sales in August were down 7% year-over-year, continuing a trend of subdued sales activity. This further contributes to the rising months-of-supply.

What does this mean for prices? Historically, home prices begin to decline when months-of-supply exceeds six months. While we are not at that point yet, the current level of 4.2 months is a significant rise from the pandemic lows and suggests that price growth will slow considerably in the coming months.

Regional Variations in Months-of-Supply

While the national average sits at 4.2 months, months-of-supply varies across different regions. For instance:

Northeast: Currently, months-of-supply sits at 4.5 months, slightly above the national average. The region’s higher property prices and slower sales contribute to this higher number.
Midwest: The months-of-supply here is at 4.1 months, a reflection of more affordable housing and steady demand.
South: At 3.8 months, the South has one of the lower months-of-supply rates, due to strong demand driven by population growth and job market strength.
West: The West faces significant affordability challenges, with months-of-supply at 5.0 months, approaching the threshold for a buyer’s market. High home prices and elevated mortgage rates are slowing sales considerably in this region.

Mortgage Rates: A Key Factor in Slowing Sales

One of the primary reasons for the slowdown in both sales and inventory is the rising cost of borrowing. As of September 2024, mortgage rates are hovering above 7%, the highest they’ve been in over two decades. This has made housing significantly less affordable, particularly for first-time buyers.

The Relationship Between Rates and Inventory

The impact of high mortgage rates isn’t just limited to buyers. It also affects sellers, especially those who purchased homes in the past few years at much lower rates. These homeowners are reluctant to sell, knowing they would need to take on a new mortgage at a much higher rate for their next home. As a result, fewer homes are coming on the market, further exacerbating the inventory shortage.

Could Months-of-Supply Exceed 5 Months?

Given current trends, many experts predict that months-of-supply could exceed five months by mid-2024, especially if inventory levels increase. This scenario could lead to price corrections in many markets, particularly those already seeing softening demand. For example:

If sales continue to remain depressed, even a modest increase in inventory could push months-of-supply above five months, tipping the balance in favor of buyers(National Association of REALTORS®).

Buyer Hesitation and Economic Uncertainty

Adding to the market’s challenges is buyer hesitation. Many potential buyers are waiting for more favorable conditions, either in the form of lower mortgage rates or falling home prices. Additionally, ongoing economic uncertainty, including concerns about inflation and job market fluctuations, is causing many buyers to take a “wait and see” approach.

What Can Buyers, Sellers, and Investors Expect?

For Buyers: The rise in months-of-supply signals that buyers may have more negotiating power in the coming months. While inventory is still tight, homes are staying on the market longer, and price reductions are becoming more common.
For Sellers: Pricing your home competitively will be crucial in this cooling market. Homes that are overpriced may sit on the market longer, leading to the need for price reductions.
For Investors: The rental market remains strong, but the rising months-of-supply may present opportunities for long-term investments, especially if prices begin to soften in mid-2024(YCharts).

U.S. housing market in 2024

The U.S. housing market in 2024 is characterized by rising months-of-supply, slower sales, and high mortgage rates, signaling a cooling from the frenzied activity of the past few years. While prices are not expected to drop significantly in the short term, the growing months-of-supply suggests that the market may shift further in favor of buyers as we move through 2024 and into 2025.

Staying informed about these market dynamics, particularly the months-of-supply metric, will be key for anyone looking to buy, sell, or invest in real estate in the coming year.

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Mary Johnshon

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