Economic Report: Modest Inventory Improvements Lead to Slight Growth in Home Sales but Affordability Challenges Remain
By Tom Larson, with insights from David Clark, Wisconsin REALTORS® Association
After peaking at more than 91,000 existing home sales in 2021, the next two years saw a contraction of home sales, with just over 78,000 closed homes in 2022 and about 64,500 homes sold in 2023. Fortunately, if the pace of sales established through the first ten months of 2024 continues through year’s end, we should see just over 67,000 homes sold, which is an annual increase of 4.1% over 2023.
Inventory improvements are one reason for the growth in sales. Months of supply compares the number of inventory of homes available for sale in a given month with the average monthly sales over the most recent 12-month period. A rule-of-thumb used by housing analysts is that a market is balanced when there are six months of available supply. Using that benchmark, Wisconsin has been classified as a seller’s market for more than seven years. On an annualized basis, the average months of supply fell from 5.5 months in 2017 to just 2.6 months in 2022, indicating a very strong seller’s advantage in the market. Fortunately, we’ve seen modest improvements the last two years, with an average of 3.1 months of supply in 2023 and 3.5 months through the first 10 months of 2024. Furthermore, our new listings of existing homes began improving in August of 2023 and has shown positive growth for 11 of the past 13 months. Simply put, home sales improved because there are more homes on the market.
Although the inventory growth is a positive sign, the unmet demand from millennials has kept significant pressure on home sale prices. Through October of 2024, year-to-date median prices are up 8% which combined with persistently high mortgage rates and relatively flat income levels has created significant challenges for affordability. The WRA Housing Affordability Index measures the percent of the median priced home that a buyer with median family income qualifies to purchase, assuming a 20% downpayment and the remaining balance financed with a 30-year fixed-rate mortgage at current rates. The index fell to 115% in June 2024, which is the lowest level recorded since WRA began computing the affordability index in 2009. Although the index increased to 127% in October, this is well below the levels of just three years earlier when it stood at 203%. Unfortunately, the severe affordability problem has sidelined some potential first-time buyers who need mortgage rates to come down to effectively compete in this tight market.
In the immediate aftermath of the short but steep pandemic-induced recession in spring 2020, the Fed lowered the short-term Federal Funds rate to near zero to avoid a more serious economic crisis. Unfortunately, these low interest rates combined with significant increases in deficit spending created strong inflationary pressures, and the Fed began aggressively increasing rates in March 2022 to fight inflation. It eventually increased the Federal Funds rate by 5.25% over the next 17 months. The good news is that core inflation has come down, and although it remains above the Fed’s 2% target rate, the Fed decided it needed to begin lowering the interest rates to avoid creating a recession. Through the first three quarters of 2024, real (inflation adjusted) GDP has been positive suggesting that the Fed has achieved a soft landing (i.e., slowing the economy enough to tame inflation without causing a recession).
The incoming Trump administration has indicated a commitment to lowering the regulatory burden to increase economic productivity and maintain full employment, while also increasing domestic energy production to further reduce inflationary pressures. Hopefully, the administration also will make progress on the deficit, since deficit spending puts upward pressure on longer term interest rates like the 10-year treasury yield. Reducing deficit spending can help bring down other long-term rates like the 30-year fixed mortgage rates.
State and local policymakers need to also do their part. Pro-business policies should keep Wisconsin employers competitive and promote income growth for Wisconsin workers. However, we also need to offer affordable housing options for the next generation of workers. Keeping the property tax burden low and promoting new residential construction will help alleviate the shortage and fuel continued growth in the state economy.
Larson is president and CEO of the Wisconsin REALTORS® Association (WRA) | Clark is professor emerituts of Economics at Marquette University | Founded in 1909, WRA is one of the largest trade associations in Wisconsin. It represents and provides services to more than 15,000 members statewide.
