As we enter the final months of what has been a wild year for the housing market, key data suggests that we are slowly heading toward a slightly healthier and more balanced housing market as we approach 2022.
According to national real estate brokerage firm Redfin, the median home price in the U.S. reached $376,000 in September 2021—the last month for which data is provided. In order to take 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 make sense of the market.
Actual versus seasonally adjusted
If you look at the chart below, you’ll see that there are two ways of measuring home prices (and some of the other data we’ll examine here): actual and seasonally adjusted.
This is important to note, because if you look at actual prices (the blue bars), it appears that the median home price is going down—and it is. But prices almost always drop after the summer. Look at the data in the chart going back to 2016. Prices pop over the summer, then drop starting in September before bottoming out in January and then starting to recover.
For this reason, when trying to understand the trend and direction of the housing market, it’s important to look at seasonally adjusted data (the orange line). It’s an analysis technique that controls for seasonal variations in data to give us a better look at what’s really going on. When looking at that measurement, we can see that home prices continue to set new highs on a seasonally adjusted basis. The median home price is up 13.6% over this time last year, which is what’s really important.
This is not surprising—most trusted sources are forecasting housing prices to continue growing through 2022 (and I agree)—but I wanted to clear up any potential confusion about what’s happening with prices. Even though the housing market is experiencing its normal seasonal decline, on a seasonally adjusted basis, home prices continue to see strong growth.
Supporting the strong price growth is high total home sales, as seen in the graph below.
Note that this dataset follows the same seasonal pattern as prices: Demand (as represented by total homes sold) drops considerably over the winter and peaks over the summer.
On a seasonally adjusted basis, home sales are very strong. Sales are down from a year ago (–4.9%), but last year contained a lot of anomalous data. To me, what’s important is that home sales remain above where they were at this point in the year in 2019.
I think this is key because the total sales data is a great measure of the overall health of the market. Prices have increased a lot over the last year, but that hasn’t slowed down the housing market at all. In fact, home sales are on an upward trend from a seasonally adjusted perspective, which means demand is there and the foundation of the housing market remains strong.
New listings and active inventory
Next, I want to clear up something about inventory. There are a lot of ways to measure inventory, each of which tells us something different.
The metric I rely on most these days is new listings. This measures how many new properties are put up on the market each month.
I like this metric because it tells us, in the simplest way possible, how many people are selling their properties. As you can see, new listings are not doing so badly—counter to the narrative out there that “there is no inventory.”
Yes, new listings are trending downward, even on a seasonally adjusted basis, but they remain above pre-pandemic levels—which, again, is key in my opinion. There was a concerning time in early 2021 when very few new listings were hitting the market, but that is no longer the case. People are selling properties at higher than pre-pandemic levels, and I don’t think we’ll see any significant declines to new listings in the coming months.
The illusion of “no inventory”
So what’s with the narrative that “there is no inventory”? It all comes down to how inventory is defined. So far we’ve looked at new listings, which are doing well compared to pre-pandemic levels. But other common measures of inventory, like active inventory (how many houses are for sale at a given time) or days on market (how long it takes for the average house to sell), are extremely low right now.
What’s going on? One measure of inventory, new listings, is healthy, but a second measure of inventory, active inventory, is extremely low.
The answer is market competition—otherwise known as demand. In plain English, what is happening is pretty clear. A lot of people are listing their homes for sale, as demonstrated by new listings. Yet demand is so strong right now that homes are flying off the market very quickly, so the number of homes for sale at any given time (active inventory) is low.
This distinction is important because there are fears that “once inventory returns,” the market will crash due to a glut of supply. But people are already selling their homes at a healthy clip. Look at the chart above. Inventory, as measured by new listings, is solid following the dip in early 2021. It’s just that demand is exceeding supply and pushing prices upward.
Days on market and sale to list ratio
To analyze market competitiveness and demand, let’s look at two key indicators: days on market (DoM) and sale to list ratio (S/L).
First, let’s just observe how insane the above chart is. DoM has been on a downward trend for nearly a decade—but things got really wild since the pandemic. A decade ago, DoM was about 70 days; now we’re barely above 20 days.
On a seasonally adjusted basis, DoM is pretty flat right now. Not exactly great news—I’d love to see it climb back up—but it’s better than the freefall we saw last year and into the beginning of 2021. On a non–seasonally adjusted basis, things are trending in a solid direction.
In the chart below, when we look at the S/L, which measures how much a house sells for versus what it was listed for, we see a more encouraging trend. In a perfectly balanced market, we’d expect an S/L of 100%: a house sells for exactly what it lists for. A ratio above 100%, as we see below, indicates a strong seller’s market.
Similar to DoM, this measure of demand has been trending toward a seller’s market for years, but went nuts at the beginning of the pandemic. But on an actual basis and a seasonally adjusted basis, things are starting to change. Yes, I know, they haven’t changed a lot, but it appears the rise has peaked and is starting to come back down.
When looking at DoM and S/L together, to me it says that we are still very much in a seller’s market, but the madness appears to have peaked.
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What’s expected for 2022
I predict that we’re heading toward a slightly more balanced housing market in 2022.
Prices are still up big year over year, but are becoming more reasonable. Home sales are strong and indicate a solid foundation for the market, and New Listings are up from their concerning 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 predictions for the 2022 housing market in a few weeks.