Stagnant housing supply dampens demand and delays price correction

Black Knight Mortgage Monitor report shows market volatility exacerbated by inventory challenges.

Rising mortgage rates and weakening demand continued to deter many potential sellers from putting their properties on the market, exacerbating the national housing supply crisis.

About 90% of US markets faced growing inventory shortages in January, according to the findings of Black Knight’s latest Mortgage Monitor report. For-sale inventory in January decreased for the fourth month after seeing strong improvement early last year. Months of supply have stagnated at 3.1 in recent months due to cooling homebuyer demand and a weakening inflow of new listings. New listings have run at a deficit from pre-pandemic averages for 25 consecutive months now.

Andy Walden, Black Knight’s VP of enterprise research, explained that inventory shortages keep home prices higher than they would be given current affordability constraints as rising rates continue to prevent potential sellers from putting their homes on the market.

“The interplay between inventory, home prices and interest rates has been the defining characteristic of the housing market for the last two years, and this continues to be the case,” Walden said. “Today, we see buyer demand dampened under pressure from rising rates and their impact on affordability, with purchase rate-lock volumes cooling in late February. However, when rates ticked down closer to 6% early in the month, we saw a rebound in buy-side demand.

“On the other side of the equation, we’ve seen a consistent theme of potential sellers – many with first-lien rates a full three percentage points below today’s offerings – pulling back from putting their homes on the market. In fact, January marked the fourth consecutive monthly decline in overall for-sale inventory, according to our collateral analytics data, with the primary driver being a 25-month stretch of new listing volumes running below pre-pandemic averages. While demand remains weak, faltering supply has resulted in months of available inventory stagnating near 3.1 in recent months.”

Home prices continue to moderate, according to Black Knight, but at a slower pace than in recent months. Prices fell for the seventh consecutive month to 5.5% in January, down 24 basis points from December and 13 basis points on a seasonally adjusted basis – the smallest yet during that period. The annual home price growth rate (now at 3.4%) is on pace to fall below 0% by March or April.

“Sharply rising 30-year rates in February have weakened home affordability, with nearly all major US markets remaining unaffordable as compared to their own long-run averages,” Walden said. “With 30-year rates at 6.5% in late February, it took 33.2% of the median household income to make the monthly principal and interest payments on the average home purchase. That’s up from January’s 32.4% and significantly above the 30-year average of ~24%, but still, 3.5 percentage points below the 37% level reached in October 2022 when affordability hit a more than 35-year low.

“Between escalating inventory challenges and worsening affordability, we’re seeing some volatility in the market – just not in the form of widespread, steep price corrections.”