Mike Simonsen: What happens to inventory if rates fall?

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Mike Simonsen, chief economist at Compass, about what happens to housing inventory if mortgage rates fall.   Related to this episode:   ⁠⁠Mortgage Rates | HousingWire⁠⁠  https://www.housingwire.com/mortgage-rates/  ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠HousingWire | YouTube⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q  ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠   The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.

Transcript

00:00Welcome, everyone. My guest today is Mike Simonson, Chief Economist at Compass,

00:11to talk about inventory, home sales, and home prices. First, I want to thank our sponsor,

00:16Optimal Blue, for making this episode possible. Mike, welcome back to the podcast.

00:21Sarah, it's great to be here.

00:23Great to have you. And you know, things have changed a little bit since the last time we

00:27talked. So first, congrats are in order. You're Compass's Chief Economist these days. So

00:32that's amazing. Congratulations.

00:35Thank you. Thank you. You know, it was, you know, sort of not expected. I wasn't planning on it when

00:43I left Housing Wire and Altos. But, you know, I've been for 20 years, I've been focused on helping

00:49people understand the housing market. And this is a really nice place to be able to do that with a

00:56lot of agents and a lot of consumer impact. And so it's exciting for me.

01:01Well, I'm so excited for you. And I'm glad that we still get to tap your expertise

01:05on this data, especially, you know, it's a there's a few things going on right now in the housing

01:10market. So I'm really excited to talk to you. And let's first talk about, you know, with with the

01:17jobs report, we're recording this on Jobs Friday, we have a real opportunity to see rates maybe take,

01:23you know, go down a little bit because of that. So let's talk about what happens to inventory

01:28if rates do fall.

01:31So, you know, rates have been close to seven for upper sixes for all year and really for

01:40three years now. And there's a really fascinating question. You know, we know that

01:47inventory was low during the pandemic is much higher now. And so the question is, is, OK, if

01:55rates fall, does that unlock sellers who've been waiting and therefore inventory rises and therefore

02:05puts more price pressure on the market? Or if rates fall, does that unlock buyers who then create

02:15more demand faster than supply? So inventory falls and puts a floor on pricing? I'm of the view that

02:22it's the latter. And I think we can see that over time. And I've actually done some some good work on

02:29the math of this. We'll write up an article sometime soon. But but you can see, you know, since

02:372022, three, three, three full years now going into almost three and a half years, rates rose have

02:45been rising, have been high. Inventory has been rising that whole time. During the pandemic, rates

02:52fell dramatically. Inventory fell dramatically. So in my view, and in the decade before that,

03:01rates have been falling slowly. Inventory had been falling slowly before that. So in my view,

03:07you know, what happens is demand unlocks faster than supply. So when if rates fall, that means that

03:16will put that means people buy more houses faster. Inventory will fall, that'll actually put a floor

03:24on prices. We could see it a little bit last September. And last September, when rates got close

03:30to six percent for a couple of weeks, we could see that impact in in in things like sales rates and

03:40and pricing and price reductions stopped going down at that time. It was a really impactful

03:47moment. And it wasn't even very long or very low. So, you know, we we could see that last year

03:56getting close to six and a half percent really didn't help didn't move the needle much, but

04:03getting close to six did. And so if we get down to six or under for any, you know, extended period of

04:11time, I expect that that will unlock demand faster than supply. Inventory will fall and that will put a

04:18floor on on on prices. We can see that there are people who have that the complete opposite fear

04:27that if if rates fall, that's going to unlock all these sellers who've been locked in and

04:36and and they will. Therefore, they're going to list really quickly. They're going to say, oh,

04:42finally, I can sell my house because they're buyers and therefore inventory is going to flood.

04:47And that would have a negative impact on prices. I don't see any evidence of that happening in the

04:52data, but I actually ran a poll on Twitter and had five hundred or six hundred people reply to it.

04:59And 40 percent of them thought if rates fall, inventory rises. Only 30 percent or 25 were aligned

05:07with my view, which is if rates fall, inventory falls. It's so interesting. This is the struggle

05:13always, right? Like the rates inventory thing. Do you feel like we have had enough, you know,

05:19inventory has been building over the last year. We are so much better than we were in 2022.

05:25But but how much of that, like how much can it absorb demand? You're saying that it can't absorb

05:32that much demand. So, you know, supply is at a at finally at a sufficient level that, you know,

05:40we are seeing or we're seeing price impacts this year. So for, you know, for three years,

05:46the story's been sales are down, but prices are up. Prices sales have been very low levels. But even,

05:54you know, the Case-Shiller index came out last week or Tuesday or whatever, and it was still,

06:01you know, still showing two or three percent home price gains. It's slowing. And so we're finally at

06:08an inventory level sufficient that your weak demand means that prices are impacted. So in, you know,

06:19and the way I've kind of thought about it is that, you know, we've had three years of headlines of

06:24saying sales are down, prices are up, transaction volume down, prices keep climbing. You know,

06:31the headlines this week were prices hit new record high. And so that's been a little confusing, but

06:38I think we're in a moment where we're probably about to flip-flop that headline at where the headline

06:44will say sales are ticking up and prices are ticking down. Like we'll see the headlines flip-flop

06:52on that story. And that's because inventory is sufficient that now it means any weak demand

07:01is negative pressure on prices in a lot of the country. It's not all the country, but it's a lot

07:05of the country. And, uh, and there is room. We're not supply constrained anywhere on the transaction

07:13volume. And so you can buy a house if you want. And so that the sales volumes take up just a little

07:19bit. Okay. Going back to that poll that you took. Um, so what is the thinking? Do you, do you think

07:27from your perspective, if people are like, if, if people want to sell, that's going to flood the market

07:31because most sellers are also buyers. So isn't that sort of a net, like, I mean, you're just not

07:37really adding anything, but with those people. So I think that's, I think that's, um, one assumption

07:43that gets overlooked, uh, by those folks. So yes, most sellers are buyers. The, so the marginal change

07:49in inventory comes from investors or first time home buyers or retirees, or those are the, the elements

07:57of the folks who are not, um, who are not buyers and sellers in the same transaction. So then you

08:05think about what, what, uh, what helps those folks and, or what, what catalyzes those actions. And, uh,

08:15and my view is that, you know, if rates fall, that means first time home buyers can, can go,

08:20finally, I've got to catch a break and I can, you know, get a little bit more affordability or,

08:25you know, rates fall and suddenly a deal, an investor deal pencils out that didn't pencil out

08:31last month. So you get more transactions there. And, and I think those happen quickly.

08:37The caveat there and is, and why some people think, uh, the opposite, which is the caveat is that

08:46why do rates fall? If rates fall, because like today the job data was really bad.

08:54Right. And, uh, and so if everybody, if like we have a big recession and people are worried about

09:03their jobs and their income, then falling rates has to contend with that negative macroeconomic

09:10backdrop. It's a, it's a, like, like, so that would be a caveat to that. Um, as Logan has pointed out,

09:19even though the jobs number turned bad today, like we still have, we're still a lot of people who are

09:25employed. And so, um, and, and, and incomes are rising faster than home prices. So to me, that's still

09:34argues for demand moving faster than supply. Um, I think in most of the, the inventory, inventory,

09:43rate change periods over the last 40 years, it actually holds true. Declining rates spurs demand

09:51faster than supply. So inventory falls rising rates, inventory rises. And, um, and so that's

09:57in general, we've found that to be true. I love the nuance you're bringing to this conversation,

10:02you know, just about like, well, why, why are rates falling? Because it's just, I mean, in housing,

10:07we always think, you know, that's, Oh, that would be great. But you know, there's a backdrop there.

10:11And the truth is when the rest of the economy is doing great, when, when Americans are doing great,

10:17then sometimes housing gets hit as it has in the last couple of years. Right. So if it goes down

10:23and it's better for housing, you have to go, but why? I think that's such a great, a great, uh, thing

10:27to think about. Yeah. And, you know, we haven't really had a recession in 15 years, right? So this whole,

10:36you know, we had a little blip during, during, you know, three weeks of COVID, but,

10:40but we haven't really had a, a big job loss recession, uh, for so long that it's hard to know

10:50how will, you know, homeowners with huge equity and cheap mortgages, how will they respond to that

10:57when they lose their jobs? You know, I think they will, my view is that, uh, in a big job loss

11:04recession, because we have such great equity and such low mortgage payments, we're not going to

11:10be selling those homes. Uh, you can't, you know, if you have a 2.8% mortgage in Dallas and you lose

11:18your job, you can't go rent an apartment cheaper than that. You absolutely can't. So, so even if you

11:26lose your job, the best thing to do is hold onto the house. So we're not going to see a lot of

11:33inventory in my opinion, about if there's, even if there's a job loss recession, we'll see some,

11:40there will be some folks who are, you know, like I'm moving in with mom or I am, you know,

11:46leaving California, uh, and, you know, move into Phoenix, you know, to save a little money or

11:52something like that. Like we will see some of that activity. So we will see some inventory go. We

11:56won't see a lot of, um, of distressed inventory, but, but we will see inventory rise. That will be a,

12:03a, a rising function for inventory. I always love to pick your brain about specific markets because

12:09you have this incredible, um, data insight into everything that's happening in the country. And so

12:15you talked a little bit about places where, you know, basically if you can buy a house, you,

12:19if you want to buy a house, you can, well, there are pockets. So where are those pockets where it's

12:23still really, where inventory is still really constrained? Well, it's still really constrained

12:27in the Northeast. Um, you know, and, and we've talked about this phenomenon of migration where

12:33for years we would sell our house in Buffalo and buy in Orlando. Um, and, and then if you're

12:41graduating college and, you know, getting married in Buffalo, you buy a house from the guy who just

12:45moved to Orlando, uh, but he's not moving to Orlando right now. And it's not just mortgage rates,

12:52it's insurance. It's, it's the cost of washing machines. It's everything is more expensive.

12:57So we've stopped moving down significantly, maybe 30%. And so, uh, so inventory is still tight in Buffalo

13:06and is, you know, much higher in Orlando. We're not selling in Buffalo. We're not buying in Orlando.

13:12So the Northeast is generally tighter. However, that being said this year, even in the Northeast

13:19inventory is rising, uh, is, you know, finally rising. And I think, you know, if rates stay

13:26around, you know, in the upper sixes like this, I think next year, you'll see that continue to go.

13:30Like, as we said, higher rates and higher inventory, we will see that continue. And it'll,

13:35so we'll see, even in the Northeast that will loosen up a little bit, um, and, and slowly get

13:42back there. So, you know, Connecticut up and in through the first quarter was still had fewer

13:47homes on the market than last year. Now it's got about 12% more. So even Connecticut is like starting

13:53to increase it in inventory. California this year is on the opposite end of the spectrum. So nationally,

13:59there are 27% more homes unsold on the market. California is 37% this year. Oh, wow. And I may

14:07be speculating there that I don't know, you know, what's the train change because California was

14:13better than ever, better than national for the first two years of this cycle now is worse. So

14:19why the lag time? It could be that the jobs numbers that we saw today have been impacting California

14:28sooner. And so maybe there's some of that. So California, the jobs lost, but not the benefit

14:34of cheaper mortgage rates. So you could, you could see maybe that was the catalyst, but,

14:40but so California is up 37% year over year and that's impacting prices and, uh, and, you know,

14:46and even transaction, you can see it in demand because transaction volume is not ticked up yet in

14:50California. That is so interesting. I was going to ask you about California cause it's always the,

14:54you know, most interesting thing going on just because of all the dynamics there. Of course you

14:58live there, that's your home base. So, you know, better than anything I would think.

15:03Yeah. I mean, I, I pay attention to the California markets. I live in San Francisco and, um, you know,

15:09San Francisco is a unique beast because of, it is a, you know, very driven by the tech economy.

15:15Um, there are some, you know, in and down in San Jose, you know, there's whatever,

15:215 million people, there's still only 1100 homes for sale, you know, in San Jose. So even that's

15:27up 24% year over year though. So like a little bit of growth everywhere in the country.

15:34So interesting. Okay. Well, let's talk a little bit about, um, where you're seeing home prices,

15:38like even before, you know, whatever inventory that we might see or whatever happens, where are home

15:45prices right now where you're like, Hmm, we should probably watch this space. And I'm thinking

15:49Florida, Florida keeps coming up, but I wonder if you share that view. Yeah, well, sure. A lot of

15:55the Florida markets for sure, um, have had price pressure. They've had a price pressure for a long

16:02time. Now, some of them have had significant moves in the Florida markets. Um, you know, Miami this year

16:09for sure. Uh, but, but, but sort of everybody knows that, uh, outside of Florida, I think the

16:15interesting one to watch is Colorado. Uh, Colorado has had a, um, you know, big inbound migration

16:25pattern over the years and that slowed way down and as we're not moving as much. And so inventory

16:30is up in Colorado and there is definitely price pressure in Colorado. You know, you might think

16:34like, you know, Florida, Texas, and Arizona, but, but you might not be thinking about Colorado as,

16:41as one that is, um, is potentially negative. There are some of the California markets are, uh, flat or

16:48negative year over year. And, and San Francisco looks down year over year. Um, you know, and, and

16:54all these cases, some of the Florida markets are pretty substantial moves, but these are like a couple

16:59percent. So, um, but it's unusual for home prices to decline, you know, in a year. So, uh, so it's notable

17:10that a couple percent move is a notable change. Um, and meanwhile, if, if, um, prices are ticked down a

17:18couple percent, but incomes are up 4% year over year, that's a step in the right direction for

17:25affordability. So one of the, um, things that the data tracks, that the Altos housing where our data

17:32tracks is the, um, number, the percentage of homes that take a price decrease before they sell,

17:38right? Yes. Which, and you've pointed out like it's normal for about a third of the homes to take

17:44a price cut before they sell, because, you know, sellers are like, Hey, let's see how much we can

17:49get. Right. So it's a strategy, but it is up, it is up over 40% nationally right now. What, what do you

17:57make of that? So, uh, that is one of the leading. So yes, I think it's 42% of all single family homes

18:05that are on the market have had a price cut from the original list price. Um, and so that is higher

18:11than any July of the last 12 years. It is, uh, uh, not, it's not skyrocketing each week like it was in

18:232022. Um, so, uh, but what it tells us is that there's sufficient supply. Buyers have their option.

18:32And if you don't price your house right wisely, then you're not going to get the offers. And so,

18:40uh, it is, you know, if I'm a seller in this moment, I am, I'm using a time to say like,

18:47what's the right price for this house, as opposed to let's like maybe try fishing for it. Uh, so you

18:53can see that in the data. You can also see, for example, you know, when we talked about

18:57if we get lucky and rates drop, uh, we will see that some of those offers get made. And so

19:05some of those sellers don't have to do the price cuts. And so we'll see that the price cuts level

19:11off. On the other hand, if the, if the economic news breaks the other way, so jobs, job news today

19:17were, was favorable for, for rates, uh, inflation numbers. So earlier in the week were kind of not

19:26favorable for rates, right? They were, they were showing higher inflation. So, so if, if, if we get

19:35the data breaks the wrong way and rates jump, say over 7% again, you'll see it immediately in the

19:45price reductions data. You'll see it because, you know, this weekend there were buyers who didn't

19:50make an offer because it got too expensive. On Monday, those sellers go, we didn't have any

19:56offers. Let's drop the price. And so you'll see that spike. You see that spike almost to the day

20:01after a big jump in mortgage rates. And so that is, you know, these are the homes that are on the

20:06market. Now they get offers in August. It closes maybe in September. And then, you know, you start

20:11hearing about that in October, but you can really see it right now in the data. So what is the pending

20:17home sales data telling you about the market right now? So there's a, there are some tricky

20:22headlines in pending home sales in the weekly pending home sales in the Altos data. And the data I get

20:29to look at is we are showing slight increases in sales over 2024. That was through June. They were still

20:42basically flat or negative, fewer sales in, into June and July. Now we've had several, we've had a bunch

20:53of weeks and maybe eight weeks in a row of, of the pending home, the weekly pending home sales coming in

20:59above last year. These are pending. So if they're, they get take offers in July, they close in August or

21:08September. And so the closed sales in the future look like they're going to tick up just a little

21:14bit to me. So, but the NAR released their pending home sales estimates for July this, this weekend,

21:21and the, they were up a little bit. The seasonally adjusted were down. So it's like some of the

21:28headlines were home sales are down again. And I think they might have, I think those headlines might

21:35be focusing on the wrong chunk of data because it, it looks to me like there's just some signals of

21:43some improvements. Last year in June, July and August, that's when rates were the highest and

21:49sales were the slowest. So it doesn't surprise me that we, we get a few extra sales this year,

21:54like a little bit of growth. If we roll into September and rates are still in the upper sixes,

22:01then, uh, then the comparisons in the fourth quarter will get harder again.

22:07Boy. Okay. So to me, so much interesting stuff here, but the thing to, to pay attention to is

22:14that tipping point of, is it flipped the home sales down home prices are up. Are we going to see that

22:21turn? And if so, uh, does it stick? So we will be, Mike, we'll be making sure to check back in with

22:28you. Have you on again soon and thank you so much. Appreciate you. You bet, Sarah. I'm always happy to be here.

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