It suddenly looks like there are too many homes for sale. Here's why that's not quite right

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watch now Anyone out shopping for a home today knows there is still precious little for sale. The housing market is just beginning to come out of its leanest few years in history. Inventory of both new and existing homes is finally rising, but there is something suddenly strange in the numbers: The supply of newly built homes appears to be way too high. The numbers, however, are deceiving due to the unprecedented dynamics of today's housing market, which can be traced back two decades to another unprecedented time in housing, the subprime mortgage boom. All of it is precisely why home prices, which usually cool off when supply is high, just continue to rise. The supply scenario There is currently a 4.4-month supply of both new and existing homes for sale, according to the National Association of Home Builders, or NAHB. Months' supply is a common calculation used in the market to measure how long it would take to sell all the homes available at the current sales pace. A six-month supply is considered a balanced market between a buyer and a seller. Supply was already low at the start of this decade, but pandemic-driven demand pushed it to a record low by the start of 2021 at just two-months' supply. That shortage of homes for sale, combined with strong demand, pushed home prices up more than 40% from pre-pandemic levels. Now supply is finally beginning to climb back, but the gains are mostly in the new home market, not on the existing side. In fact, there is now a nine-month supply of newly built homes for sale, nearly three times that of existing homes. New and old home months' supply usually track pretty closely. New construction now makes up 30% of total inventory, about twice its historical share, according to the NAHB. Single-family homes in a residential neighborhood in San Marcos, Texas. Jordan Vonderhaar | Bloomberg | Getty Images "June 2022 recorded the largest ever lead of new home months' supply (9.9) over existing single-family home months' supply (2.9)," wrote Robert Dietz, chief economist for the NAHB. "This separation makes it clear that an evaluation of current market inventory cannot simply examine either the existing or the new home inventory in isolation." This unusual dynamic has been driven by both recent swings in mortgage rates and an unprecedented disaster in the housing market that began 20 years ago. The foundation of today's tricky numbers This housing market is unlike any other because of economic forces unlike any other. First, in 2005, there was a massive runup in home sales, homebuilding and home prices fueled by a surge in subprime mortgage lending and a frenzy of trading in new financial products backed by these mortgages. That all came crashing down quickly, resulting in one of the worst foreclosure crises since the Great Depression and causing the ensuing Great Recession. Single-family housing starts plummeted from a high of 1.7 million units in 2005 to just 430,000 in 2011. By 2012, new homes made up just 6% of the total for-sale supply and, even by 2020, housing starts had yet to recover to their historical average of about 1.1 million units. They sat at 990,000. Then came the Covid-19 pandemic and during that time, consumer demand surged and mortgage rates set more than a dozen record lows, so builders responded. Housing starts shot up to 1.1 million in 2021. The Federal Reserve was bailing out the economy, making homebuying much cheaper, and the new work-from-home culture had Americans moving like never before. Suddenly, supply was sucked into a tornado of demand. Mortgage rate mayhem The current strange divide in supply between newly built and existing homes is also due to roller-coaster mortgage rates, dropping to historic lows at the start of the pandemic and then spiking to 20-year highs just two years later. Millions of borrowers refinanced at the lows and now have no desire to move because they would have to trade a 3% or 4% rate on their loans to the current rate, which is around 7%. This lock-in effect caused new listings to dry up. It also put builders in the driver's seat. Homebuilders had already ramped up production in the first years of the pandemic, with single-family homes surging to more than 1.1 million in 2021, according to the U.S. census, before dropping back again when mortgage rates shot up. Builders have been able to buy down mortgage rates to keep sales higher, but as of this May, they are building at an annualized pace of 992,000. Resale listings improved slightly this spring, as mortgage rates fell back slightly, and by June, active listings were 16.5% higher than they were the year before, according to Redfin. Some of that increased supply, however, was due to listings sitting on the market longer. "The share of homes sitting on the market for at least one month has been increasing year over year since March, when growth in new listings accelerated, but demand from buyers remained tepid, as it has been since mortgage rates started rising in 2022," according to a Redfin report. A home available for sale is shown in Austin, Texas, on May 22, 2024. Brandon Bell | Getty Images Growth at the low end