Locked up inventory is locking out potential homeowners
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Last summer, Federal Reserve Chairman Jerome Powell told reporters that spiking mortgage rates would help “reset” a red-hot housing sector. “I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset,” he said.
Last week, the Fed raised its benchmark rate another quarter percent, the 11th (and possibly last) such increase in its effort to bring down inflation. But while the Fed tries to reset the market and control housing costs by tightening demand, Indiana realtors argue that rebuilding supply is even more important to homebuyers – especially as higher rates have had the unintended consequence of worsening our statewide shortage of homes for sale.
Indiana has been a “seller’s market” (below a five month inventory of homes for sale) since 2016, when there were roughly thirty thousand active listings across the state’s MLS marketplaces on any given day. Today, that number is just over ten thousand, and supply pressures have hardly let up since mortgage rates passed 5% and surged towards 6% last spring.
In fact, Indiana has seen demand rebound faster than the U.S. in 2023 as homebuyers adjusted to elevated rates and started returning to the market. Existing home sales started quickly before slowing in the second quarter to finish 14% below the first half of 2022 – but nationally, the year-over-year gap was 23%. While U.S. housing prices have dropped five straight months, Indiana’s median price continues to rise (up 5% year-to-date).
Ironically, Federal Reserve policies aimed at easing inflation have contributed to higher home prices in Indiana by way of a phenomenon known as the “lock in” effect.
While higher mortgage rates take an obvious toll on demand, they’ve also discouraged current homeowners from listing their homes for sale. Most outstanding mortgages have rates below 4%, and there’s a powerful incentive to stay put instead of trying to find and finance another house at rates near 7%.
With many potential sellers feeling locked into pre-2022 loans, new listings have slid 22% below 2022. Inventory has tightened and we’ve seen a close relationship between new listings and pending sales (both averaging around 2,100 a week since early April) as buyers seem eager to pursue newer options.
That’s why even with total sales down, Indiana is averaging less than a week from listing to pending contract since the end of March with sale prices at 98% of their original asking price. Successful buyers in this climate also have the budgets to manage higher rates (or at least afford monthly payments until it’s time to refinance) – sales above $300,000 have only dropped 6% versus 2022.
These dynamics have pushed Indiana home prices up every month this year to hit $257,000 in June…and widening the affordability gap as prices continue to outgrow wages.
So where does this leave Indiana’s housing market in the second half of 2023 and beyond?
As price appreciation stays positive, homeowners continue to gain equity and build wealth. But fewer homes for sale (at higher prices) means fewer first-time buyers able to embrace the benefits of homeownership.
There’s not much we can do to influence monetary policy and the lending markets. The Fed has finally paused to consider the need for future rate hikes, and continued progress on inflation will eventually bring mortgage rates back below 5% (and prompt locked-in sellers to reevaluate their plans).
But we can continue to chip away at the state-level housing shortage that strains the low cost of living and high quality of life appeal that have helped Indiana lead the Midwest in population growth and enjoy record-setting economic development success. Supply simply hasn’t kept up with demand.
We’ve built around 110,000 new (net) housing units over the last decade while growing our population by more than a quarter-million Hoosiers living in 140,000 new households. And that’s while other trends further reduce the pool of potential existing inventory – e.g. owners staying in their homes longer on average, a growing senior population aging in place, older housing stock falling into disrepair.
State and local policymakers acknowledge the housing math isn’t adding up and are taking action at the urging of realtors and other homeownership advocates: Indiana’s new state budget makes historic funding commitments to housing-related infrastructure and residential development across urban, suburban and rural communities.
There may be some lean months to come before the outlook improves. By next summer, let’s hope we look back on last week’s rate hike as the final act of this anti-inflation campaign, leading to lower lending rates and the lock-in effect loosening its grip on current homeowners. And at the state level, new housing investments turning into new housing inventory – a ‘market reset’ that improves affordability and expands homeownership.