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Will the Tight Inventory Loosen Up for the Spring Homebuying Season?

HomeThe up-and-down existing-home sales market is expected to take another slight downward turn in February due to persistently tight inventory, but the market may turn around in the spring, according to First American Financial Corporation [1].

The industry is anxiously awaiting the existing-home sales report for February 2016, which will be released on Monday, March 21, by the National Association of Realtors [2] (NAR).  In January’s report [3], the pace of sales slowed to a crawl but still hit their highest level in six months at 5.47 million—but supply remained an issue as the number of existing homes for sale (1.82 million) for January was down 2.2 percent over-the-year, according to NAR.

Even with January’s slowing pace, existing-home sales have bounced back from November’s decline caused by the TRID rule taking effect on October 3, 2015.

“The market stability in January was a welcome sign indicating continued strength and resilience after the substantial drop in sales in November caused by closing delays due to the implementation of the Know-Before-You-Owe-Rule, also referred to as the TILA-RESPA Integrated Disclosure rule,” said Mark Fleming, Chief Economist at First American. “We continue to see no indications of any fundamental changes in market conditions and January was no exception, showing an existing-home sales market in line with expectations for sales activity.”

Tight inventory has been a concern among many housing market analysts heading into the spring home buying season. NAR Chief Economist Lawrence Yun said last month with the spring homebuying season around the corner, “current supply levels aren't even close to what's needed to accommodate the subsequent growth in housing demand.” Existing-home inventory is currently at 4.0 months.

3-17 graphFleming believes that the tight inventory the housing market has experienced as of late will turn around in the next couple of months.

“As implied by the 2.5 percent decrease in January in the NAR Pending Home Sales Index, actual existing-home sales are expected to show a decline in February compared to January, while still showing positive year-over-year growth compared to February 2015,” Fleming said. “This is due in large part to tight inventories, which is keeping the market from aligning with its potential. However, this is expected to be a temporary condition and should reverse course as inventories increase with the start of the spring home-buying season.”

On Wednesday, the Fed announced for the second straight FOMC meeting following December’s liftoff that the federal funds target rate would remain at 0.25 to 0.5 percent. The following day, on Thursday, Freddie Mac announced [4] that mortgage rates had inched higher for the third week in a row, with a 30-year fixed-rate mortgage averaging 3.73 percent.

“Last month, we mentioned that the likelihood of modest mortgage rate increases seems less likely now due to the global economic uncertainty and depressed energy markets. However, conditions have recently stabilized, if not improved slightly,” Fleming said. “Even though the Federal Reserve did not raise the benchmark Federal Funds Rate this week, they did indicate that it is likely we shall see an increase in the Federal Funds Rate later this year.”

He continued, “Regardless of the rate hike path, we expect mortgage rates to increase modestly as investor demand for the 10-year Treasury bill, which truly drives mortgage rates, fades with a more certain global economic outlook. This has the potential to impact many aspects of the housing market, from affordability to inventories, and is something that will be watched with peaked interest over the course of 2016.”