July Market Report: How Close Are We to a Balanced Market?

The wild housing swings of the last three years have made it hard to stop and think about what’s best for agents, buyers, and sellers alike. Sure, lower mortgage rates would be great. But sub-3% rates and sudden pandemic moving trends shocked the market into where we are today. 

The sweet spot is a balanced market, which occurs when demand from buyers meets supply from sellers. Experts typically define that as a 6-month housing supply. At that point, the market finds a rhythm that suits all parties involved. Commissions may not pile up like they did during 2021, but agents can benefit from more predictable activity because homes should sell for close to their asking prices on more consistent timelines. 

Looking beyond all the immediate news, it’s worth asking: How close are we to seeing a balanced market in 2023?

Factor #1: Inventory

Key stat: There’s a 3-month supply of existing U.S. homes for sale

As a general rule of thumb, a housing supply of under five months tends to indicate a seller’s market; anything over seven months signals a buyer’s market. By this definition, we’ve been in the middle of a seller’s market for years, even if the trend line has improved slightly since November. The lack of new listings hasn’t helped either. 

“The dearth of new listings has dogged the housing market for almost a year now,” says Zillow Senior Economist Jeff Tucker. “This will probably mark the low water point for year-over-year comparisons in new listings. They began to plunge last July, so this year’s low flow will not look as extremely low by comparison.” But even if the annual comparisons show some signs of improvement, significant increases in new listings activity appears unlikely in the near term.

On the positive side, new construction has picked up. Housing starts in May hit 1.63 million, a nearly 6% jump from this time last year.

As Zillow Senior Economist Nicole Bachaud puts it, “With incentives sweetening the deal for buyers, new home sales have been rising amid falling existing home sales — raising homebuilder confidence.”

Takeaway: Recent inventory has fluctuated between two and three months of supply. We’re still far away from a balanced market, but new construction can help offset some of the strain on agents trying to navigate a slower summer season.

Factor #2: Mortgage Rates

Key stat: Over 60% of current homeowners with a mortgage have an interest rate under 4%.

A “high” mortgage is subjective — 7% interest needs context. The context in 2023 is that more than three out of every five homeowners with a mortgage have little incentive to take on higher payments, especially when rates were under 3% just two years ago.

“That’s a low risk environment,” says Zillow Chief Economist Skylar Olsen. “They have financial stability, they have lower monthly payments, they can afford to save. They do not want to give that up. That’s what’s keeping the new listings back so much.”

Over time, the memory of 3% will fade and a new normal could emerge. A stable mortgage rate under 6% may entice more supply and demand. In June, the Federal Reserve chose not to raise interest rates for the first time since March 2022. But after mortgage rates leveled off in the beginning of spring, they’ve started rising over 7% again. A solid jobs report and steady wage growth have some economists expecting more interest rate hikes coming soon — something that would likely prolong the return to a more balanced market.

Takeaway: Don’t expect 3% mortgage rates to return anytime soon for your clients, but if inflation stabilizes, the housing market could too.