Inventory woes snag housing, lending growth

Pent-up demand and declining rates offer glimpses of optimism among the home buying public, but persistent low inventory remains a thorn in the side of the housing market, according to new research. 

"The housing market is facing a significant shortage of homes, and this supply constraint is unlikely to be resolved soon," a quarterly report from Veros Real Estate Solutions said.

"Although inventory has steadily increased over the last year, it remains well below pre-pandemic levels. This is because many homeowners have mortgage rates below 4%, making it less likely for them to move."

Although recent downward rate moves are bringing hopes for increased sales volumes, the surge in housing costs the last few years have left many markets out of reach for aspiring homeowners, with the national average price consistently posting record-high values. Meanwhile, the number of listings remains lower than historical norms.

As a result of current supply-and-demand factors, home prices are not expected to deviate significantly from their current trajectory, Veros said. Still, some moderation in the rate of growth looks likely. The risk management firm expects modest price appreciation of 3.1% across the U.S. over the next 12 months. The anticipated increase narrowed from second-quarter predictions of 3.2%. 

The summertime decline in mortgage rates cracked open the window of opportunity some hopeful buyers have been waiting for, according to Veros. At the same time, any significant uptick in sales may not occur as quickly as hoped without more movement in home prices, initial data suggests. 

Last week, Realtor.com found early-summer buyer interest stalled in September, while Fannie Mae observed similar trends. 

"A growing share are now pointing to high home prices rather than high mortgage rates as the primary sticking point for affordability," said Mark Palim, Fannie Mae senior vice president and chief economist.

Recently, researchers at the government-sponsored enterprise said existing-home sales would likely finish the year at its lowest mark since 1995.

"This signals to us that consumers are paying attention to the easing interest rate environment but still feel stymied by the considerable run-up in home prices over the last four years," Palim said in Fannie Mae's latest Home Purchase Sentiment Index. 

Only 19% of consumers surveyed in Fannie Mae's September sentiment research said the current market represented a good time to buy. While up from 17% month over month, the percentage still came in near all-time lows. Meanwhile, 39% said home prices are likely to increase over the next year, up from 37% in August. 

The interest-rate component looked far more favorable among consumers, with the share of respondents expecting further decreases in the upcoming year moving up to a record high of 42%. In September, Fannie Mae reported 39% expecting rates to fall. 

Sentiment regarding interest rate developments drove much of the spike in the overall HPSI, which hit a reading of 73.9 in September, the highest in more than two years. The score rose from 72.1 a month earlier and surged from 64.5 a year ago. 

"But we've yet to see consumers' newfound rate optimism translate into a meaningful increase in home sales activity," Palim noted.

Last month, the Federal Reserve cut its funds rate by 50 basis points, fueling hope in the housing market that Treasurys would fall and lead home lenders to make similar moves. A hotter-than-expected September jobs report dampened some enthusiasm, though, raising questions about the upcoming size and pace of the next Federal Reserve reductions. Last week, Freddie Mac researchers also hinted that the market might have jumped the gun initially following the Fed's September decision.

In its report, Veros found high costs and insurance charges in the Sunbelt, whose housing markets boomed during the pandemic, are now deterring buyers away from many of those areas. 

On the other hand, home buyers more frequently are looking for affordable opportunities in the Northeast and Midwest. The top ten markets for price growth are all located in those regions, with values expected to rise between 5.9% and 7.6%. Rochester, New York, topped Veros' list, followed by Rockford, Illinois, and Reading, Pennsylvania.