Introduction
Despite recent increases in resale and new home listings, the US housing market suffers from a severe inventory shortage. According to a recent report from Freddie Mac, the number of homes for sale remains well below pre-pandemic averages. Multiple headwinds have converged to create a market where demand far exceeds supply, and this imbalance will likely persist for the foreseeable future.
Homeowners “Locked In” by Low Mortgage Rates
One of the primary factors contributing to the inventory shortage is the so-called “lock-in effect.” Many homeowners secured ultra-low mortgage rates during the pandemic, with some locked in at below 3%. Now, faced with much higher rates in the current market, these homeowners are reluctant to sell, as doing so would mean taking on a new mortgage with a significantly higher interest rate. As a result, fewer homes are entering the market, limiting the options for prospective buyers and keeping prices elevated.
The Role of New Construction in Housing Prices
While new home construction has picked up in recent months, it’s not enough to close the massive gap between supply and demand. Builders struggle with challenges, including higher material costs, labour shortages, and regulatory hurdles. Even with more new homes entering the market, the overall inventory remains far below what’s needed to meet potential homebuyers’ demand.
Some experts are optimistic that new construction will offer some relief in the coming months, but the reality is that new builds alone can’t solve the problem. According to a report by Pew Charitable Trusts, the US faces a housing shortage estimated at between four and seven million homes. Bridging this gap will require a multi-faceted approach, including policy changes, incentives for builders, and efforts to make homeownership more accessible.
The Impact of Mortgage Rates
In addition to new construction, a decline in mortgage rates could help ease the inventory shortage. If rates fall significantly, more homeowners may feel comfortable selling their homes, as they could potentially finance their next property more favourably. While mortgage rates have already come down from their 2023 peak, they remain high enough to deter many potential sellers from entering the market.
Economists predict that rates will slowly decline in the coming years, but it may take time for them to reach a level that prompts a meaningful increase in home listings. In the meantime, buyers and sellers will continue to feel the effects of limited inventory.
Is a Price Drop on the Horizon?
Given the current dynamics of the housing market, a significant reduction in home prices is unlikely in the near term. While some regions may experience localized price declines, particularly in overheating markets during the pandemic, the broader national trend suggests that prices will remain elevated as long as demand outpaces supply.
The lack of available homes, combined with steady buyer demand, creates an environment where prices are more likely to stabilize than drop dramatically. For buyers, this means continued competition for the limited number of homes available, particularly in desirable areas where inventory is even scarcer.
What Lies Ahead?
Ultimately, the key to reducing housing prices is increasing the supply of homes for sale. However, with homeowners locked into low mortgage rates and new construction unable to keep pace with demand, seeing a meaningful shift in the market will take time. The inventory deficit is too large to overcome in the short term, and most experts agree that it will take years of sustained efforts to balance the market.
In the meantime, prospective buyers will need to navigate a competitive landscape, while sellers may continue to benefit from elevated prices due to the ongoing shortage of homes.
As the market slowly recovers, the hope is that more inventory and lower mortgage rates will eventually lead to a more balanced housing market. However, patience may be required for those waiting for a significant price drop—the next major shift in the US housing market is unlikely to happen any time soon.
