As we enter the final months of what has been a wild year for the housing market, key data suggests we are slowly moving towards a slightly healthier and more balanced housing market as we approach 2022.
According to national real estate broker Redfin, the median US home price reached $376,000 in September 2021, the last month for which data is provided. To get a more detailed look at the housing market before and during the pandemic, I’ve provided some charts so we can evaluate the data and understand the market.
Actual vs. Seasonally Adjusted
If you look at the chart below, you’ll see that there are two ways to measure home prices (and some of the other data we’ll explore here): actually and seasonally adjusted.
This is important to note because when you look at the actual prices (the blue bars), it seems that the median home price is falling – and it is. But prices almost always fall after the summer. Look at the data in the chart going back to 2016. Prices rise during the summer, then fall from September before bottoming out in January and then begin to recover.
For this reason, when understanding the trend and direction of the housing market, it is important to look at seasonally adjusted data (the orange line). It’s an analysis technique that checks for seasonal variations in data to give us a better idea of what’s really going on. Looking at that measurement, we can see that house prices continue to hit new highs on a seasonally adjusted basis. The median home price is up 13.6% from this time last year, which is really important.
This isn’t surprising – most reliable sources predict that house prices will continue to grow until 2022 (and I agree) – but I wanted to clear up any confusion about what happens to prices. Although the housing market is experiencing a normal seasonal decline, house prices, adjusted on a seasonal basis, continue to grow strongly.
Strong price growth is supported by high total home sales, as can be seen in the chart below.
Note that this dataset follows the same seasonal pattern as prices: Demand (as reflected by the total number of homes sold) falls significantly in the winter and peaks in the summer.
Seasonally adjusted, house sales are very strong. Turnover is lower than a year ago (-4.9%), but last year contained a lot of deviating data. What’s important to me is that home sales remain above 2019 levels at this point in the year.
I think this is critical because the total sales data is a good measure of the overall health of the market. Prices have risen sharply in the past year, but that has not slowed down the housing market. In fact, home sales are trending upwards from a seasonally adjusted perspective, meaning demand is there and the housing market fundamentals remain strong.
New offers and active stock
Next, I want to clarify something about the inventory. There are many ways to measure inventory, each of which tells us something different.
The stat I rely on the most these days is: new lists. This measures how many new homes come on the market each month.
I like this stat because it tells us in the simplest possible way how many people are selling their properties. As you can see, new listings aren’t doing too badly – contrary to the story out there that “there’s no inventory”.
Yes, new lists are trending downward, even on a seasonally adjusted basis, but they remain above pre-pandemic levels – which, again, I think is key. There was a worrying time in early 2021 when very few new offerings hit the market, but that is no longer the case. People are selling real estate at a higher level than before the pandemic, and I don’t think we’ll see significant declines in new listings in the coming months.
The illusion of “no inventory”
So what’s with the story that “there’s no inventory”? It all comes down to how inventory is defined. So far, we’ve looked at new offerings, which are doing well compared to pre-pandemic levels. But other common metrics for inventory, such as: active inventory (how many houses are for sale at any given time) or days on the market (how long it takes for the average house to sell), are extremely low right now.
What is happening? One metric for inventory, new listings, is healthy, but a second metric for inventory, active inventory, is extremely low.
The answer is market competition, also known as demand. In plain English what is happening is quite clear. Many people list their homes for sale, as evidenced by new advertisements. Yet demand is currently so strong that homes are flying off the market very quickly, so that the number of homes for sale at any given time (active inventory) is low.
This distinction is important because there are fears that “once the stock returns”, the market will crash due to an overabundance of supply. But people are already selling their homes at a healthy clip. Look at the chart above. Inventory, measured by new offerings, is solid after the dip in early 2021. Only demand is greater than supply and prices are rising.
Days on the market and sales-to-list ratio
To analyze the competitiveness and demand in the market, let’s look at two key indicators: days on the market (DoM) and sales to list ratio (S/L).
First, let’s take a look at how insane the graph above is. DoM has been on a downward trend for nearly a decade, but it has really gone wild since the pandemic. Ten years ago, DoM was about 70 days; now we are barely above 20 days.
On a seasonally adjusted basis, DoM is currently quite flat. Not exactly great news – I’d love to see it rise again – but it’s better than the free fall we saw last year and early 2021. On a non-seasonally adjusted basis, things are moving in a solid direction.
In the chart below, we see a more encouraging trend when we look at the S/L, which measures how much a home is selling relative to what it was listed for. In a perfectly balanced market, we expect an S/L of 100%: a house is sold for exactly what it is on the list for. A ratio above 100%, as we see below, indicates a strong seller’s market.
As with DoM, this measure of demand has leaned towards a seller’s market for years, but went crazy at the start of the pandemic. But on an actual basis and seasonally adjusted, things are starting to change. Yes, I know, they haven’t changed much, but it seems that the increase has peaked and is starting to slow down again.
Looking at DoM and S/L together, it tells me we’re still very much in a seller’s market, but the madness seems to have peaked.
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What is expected for 2022
I predict that in 2022 we will be on our way to a slightly more balanced housing market.
Prices have still risen sharply year after year, but are becoming more reasonable. Home sales are strong indicating a solid footing for the market, and new listings have surged from their worrisome start to the year. Overall, as I’ve said many times before, I think we’re still on track for above-average growth in 2022, but slower growth than in 2021. I’ll have more on my forecasts for the housing market in a few times 2022 weeks.