Homebuyers, hold onto your wallets. The gains in home prices are getting bigger as the supply of homes for sale gets leaner.
The median price of a home sold in March surged 8.9 percent compared with March 2017, according to Redfin, a real estate brokerage. It is the biggest annual increase in four years. Redfin tracks prices in 174 local markets and calculated the median home price at $297,000.
High prices are the result of very, very low inventory. The supply of homes for sale was down 11.9 percent in March, compared with a year ago. As a result, sales fell 3.7 percent. The number of new listings in March dropped 5.6 percent annually, although part of that may have been due to the Easter holiday falling early this year.
"Sellers are slow to list this year and we aren't seeing enough new construction homes to fill the gap," said Redfin's chief economist, Nela Richardson. "If we don't see the new listings number turn around next month or a pickup in new housing starts, inventory will be a persistent drag on sales for the remainder of the year."
Homebuilders are not helping much. Housing starts disappointed in March, with single-family construction falling 3.7 percent for the month. Building permits, an indicator of future construction, declined 5.5 percent for the month and are barely 2 percent higher compared with a year ago. In contrast, multifamily construction is increasing considerably. Builders are banking on continued, strong demand for rental apartments, as homebuyers struggle to find affordable homes.
"The change towards multifamily could be the initial signs that affordability is starting to impact the mix of construction," noted Tendayi Kapfidze, chief economist at LendingTree. "Multifamily units are at lower price points and include significant rental units. Notably, single-family housing starts are particularly weak in the high-cost Northeast — that is also the most exposed region to the negative impacts of the tax plan."
Buyer demand is still strong, despite higher prices. Sellers are pulling back, however, likely worried they won't be able to find anything else they like or can afford. The average home went under contract in 43 days in March, more than a week faster compared with a year ago and a March record. Nearly a quarter of the homes sold for more than their list prices.
Large metropolitan markets in California, as well as Seattle and Denver, continue to see big price gains, but some unexpected markets are also seeing inflation, as well. Markets like Allentown, Pennsylvania (21.8 percent), Detroit (20.6 percent) and Las Vegas (16.5 percent) are not far behind.
The supply situation is acute in Washington, D.C., where inventory fell 22 percent in March annually, according to Long & Foster Real Estate. It would take just 1.8 months at the current sales pace to exhaust the supply. A balanced market supply is considered to be about six months.
"A 'perfect storm' of market conditions is compounding an ongoing inventory crunch," said Larry Foster, president of Long & Foster Real Estate. "Builders' margins are squeezed by rising labor and materials prices, so they are not meeting demand for entry-level and move-up homes. Would-be sellers of existing homes — many of whom refinanced at low interest rates — are reluctant to list their homes because they aren't finding the selection of properties they want to move into."
As mortgage rates continue to rise, current homeowners will have even less incentive to sell. Sales have been dropping as a result of the tight supply, and prices usually lag sales by a few months. That does not appear to be the case, however, in this cycle, as demand is outweighing everything else. It may be that young buyers are waiting, and renting longer, in order to save for higher-priced homes.