There’s an Unusual Thing Happening in the Housing Market

As interest rates rise, the US housing market has softened.

The dramatic growth in home prices that we have seen over the last two years is starting to slow because of higher mortgage rates. Sales of new homes fell to their lowest level in a year. Purchase applications are going down.

But the rapid pace of rate hikes has also resulted in an interesting statistical anomaly. Months of supply — or the number of months it would take for the existing inventory of homes on the market to sell at the current sales pace — has jumped to 4.1 from a record low of just 2.1 back in January of this year. And, as Morgan Stanley strategist James Egan notes, rarely have we seen an increase of this size.To some extent, the jump in inventory is to be expected. It’s maths. As sales volume falls while inventories rise, months of supply naturally increases.

The key question for housing watchers is whether the absolute level of inventory, which is still low by many measures, will turn out to be more important than the rate of change. It is going to be less vulnerable to fewer sales if the market is undersupplied.