Inventory, sales and price cut trends show home buyer demand has cooled across the board, but competition is strongest for the lowest-priced homes in each market, reversing a pandemic trend.
As the pandemic-fueled frenzy in the housing market begins to cool from its record-setting pace, not all types of homes are experiencing the same slowdown. Affordability is a major concern for many potential home buyers and competition is now strongest for the least expensive homes — a reversal from much of the pandemic.
During the bulk of the pandemic, buyers shopping in the middle and top price tiers faced the most competition. The annual deficit in for-sale inventory dipped the most in the top two price tiers in 2020, and was slower to recover in 2021. All the while sales remained elevated, indicating the relatively lower inventory resulted from strong demand.
Now, with higher mortgage rates and after more than a year of record price gains, the lowest-priced homes in each market are attracting the most buyers. Inventory for these lower priced homes had a less-severe dip during the bulk of the pandemic and grew back up at a faster pace than the other price tiers — in July 2021, inventory in the least-expensive tier was growing on a monthly basis at nearly twice the rate of the most-expensive homes, but growth in this segment began to taper off relative to the middle and top price tiers in recent weeks. At the end of July, inventory in the most-expensive third of the housing market was up 11% month over month, and 19.3% higher than a year earlier. Similarly, inventory in the middle third was up 12.7% month over month and 17.3% annually. Inventory is growing in the lowest-priced third as well, but only 11.2% month over month and 10.4% year over year. This could be a sign that interest in this low-price tier is slowing less than the other price tiers, as sales remain elevated for the lowest-priced homes and these homes leave the market.
While most large metro areas saw similar movement in inventory across price tiers, one market, Milwaukee, had an exaggerated increase in inventory for the least expensive homes. A large bump in the availability of these lower-priced homes might have helped some households in this area, which has long had a lower homeownership rate than similarly sized metros, find opportunities to enter into homeownership and its long-term wealth-building benefits.
Sales counts have followed a similar trend. The least expensive price tier saw the highest year-over-year increases in sales during 2021, with levels even briefly surpassing that of middle- and top-tier homes this winter. In the week ending June 20 — the most recent weekly data available — home sales in the lowest price tier were down 14.2% annually, compared to 20.3% and 25.4% annual declines in the mid- and high-priced tiers, respectively. Homes in the bottom price tier made up 26.7% of sales that week in 2022, but only 24.8% of sales during the same week a year earlier.
Sales of homes in the lowest price tier was likely driven in part by many sellers, particularly younger sellers, looking to move up to larger homes as their equity started to build from their initial home purchase. About seven in 10 home sellers last year simultaneously bought a new home, and almost half of those upgraded to a more expensive home. Sales from home flips — defined in a recent Attom report as an arms-length transaction coming within a year of a previous sale — also added liveable inventory to the market in the lowest price tier. Whereas the top price tier having a significant decline in the number of sales coupled with low inventory indicates homeowners at the top of the housing food chain are holding on to their low mortgage rates and aren’t letting up more inventory, which can further prolong the inventory shortage holding back the recovery to a balanced market.
As competition slows for all price tiers with buyers stepping back from the market, sellers often are needing to adjust their price expectations, leading many to cut their list prices. The share of price cuts for all tiers is above 10% for the first time since at least 2018, when Zillow’s series starts. While listings across all price tiers have experienced a similarly steep runup in the share of listings that had a price cut in the past six months, in recent weeks listings in the lowest price tier have seen price cuts less frequently than at other price points. That holds true in the most-expensive markets such as Los Angeles, New York and Seattle, as well as in more affordable markets such as Atlanta, Kansas City and Tampa.
While price cuts are less frequent in the lowest price tier, those homes are seeing the largest percentages shaved off with a typical price cut. The lowest-priced homes saw a median price cut of 3.3% at the end of July, compared to 3% for both middle- and top-tier homes. Overall, the share of large price cuts (those that exceed $25,000) is decreasing since the peak in early June. This shows that while sellers are still getting used to the current market conditions, expectations have already come down toward earth from the extravagant list prices that the sellers of 2021 were able to get away with.
The shifts in inventory and sales, and the movements in price cuts, show that the market is in the midst of a rebalance. And while homes aren’t going to be getting any cheaper any time soon, the balance of power in the market is giving buyers who can afford to stick around more of an upper hand than they have had at any other point since the onset of the pandemic.
