Home Sales Are Down Again, But Disappearing Inventory Is What Investors Should Be Worried About

Home sales were down again in December, the 11th straight month of decline, according to the latest report from the National Association of Realtors (NAR). And while home prices continue to rise, it’s the lack of inventory that has many investors and observers concerned. 

According to the NAR report, the total housing inventory at the end of December stood below 1 million at 970,000, down 13.4% from November with a 2.9-month supply at the current sales pace. That number was down from 3.3 months of inventory in November. 

“December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” NAR Chief Economist Lawrence Yun said. But Jack Macdowell Jr., co-founder and chief investment officer of the Palisades Group, told Benzinga that the bottom line is “we need more product on the market.” 

Austin, Texas-based Palisades is an alternative asset manager in the global residential credit market. Macdowell said he’s not buying any equity in real estate right now. 

“We’re more interested in credit. One fear I have is that we have an affordability issue driving homebuyers into the rental market,” he said. “If we don’t get more inventory into the market, either with existing or new home construction by 2024 and 2025, we may find ourselves back with pent-up demand, which could be released to an undersupplied market. That puts pressure on home prices, and we then find ourselves in an inflationary market.” 

While the latest numbers would make some believe that homebuyer demand is down, Macdowell says people should be focusing more on inventory. A lack of inventory caused buyer bidding wars early in 2022, but that was when interest rates were less than half of what they are now.

“Inventory has dropped to under a million and back to where it was in March of 2022,” Mcdowell said. “Look at the numbers, and you can see it’s a supply-side issue. And on top of that, no one is going to sell their home right now with interest rates at 6.5%.”

Prices aren’t coming down, either. Despite predictions to the contrary from many in 2022, the December NAR report shows that the median existing-home price for all housing types was $366,900 in December, an increase of 2.3% from December 2021, with prices rising in all U.S. regions. That number marked 130 consecutive months of year-over-year gains, the most prolonged home price increase in history. 

With prices still high and unsold inventory currently sitting at the 2.9-month supply rate, Macdowell says investors need to see some fairly drastic changes before deciding to dive back into the market. 

“We should be at five to six months,” he said. “From an investor standpoint, my view is we need supply-demand parity” before things change.

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