Open houses closing down

We believe the housing market is in transition.

Demand for housing surged during the pandemic, as buyers sought larger homes in more rural and suburban settings. This behavior pushed home prices to record highs and inventories to multi-decade lows.

Rising prices increased the purchasing power of existing homeowners, adding fuel to the increase in home prices. Add in fiscal stimulus and record low interest rates, and some of the affordability challenges presented by rising sticker prices have been alleviated over the last 18 months.

But with interest rates now rising and home price appreciation appearing to slow, we believe the road ahead for the housing market will be considerably more challenging.

A dynamic that we believe further complicates the picture for housing is a lack of housing supply. As we can see in the chart below, housing supply is near 20-year lows as measured by the ratio of existing home inventory to existing home sales.

Before the pandemic, home inventories had been declining as excess supply from the housing crisis was sold down and builders exhibited more conservative behavior. An unexpected surge in demand during the pandemic has now left the market undersupplied.

The economics textbook would tell you that low supply, high demand, and high prices is good for sellers. But with fewer homes available for sale, prices at record highs, and interest rates on the rise, we believe the pool of available homebuyers has declined dramatically in recent months.

We believe this means that current sellers may have to wait longer for buyers to come along, home prices may have to decline, or both. For digital disruptors in the housing market, this dynamic has created a challenge and led some companies to pivot their business altogether.

This week, Zillow (Z) announced it would end its Zillow Offers program in which the company would purchase homes, renovate them, and seek to flip them for a profit. At Titan, we’ve decreased our holdings in Redfin (RDFN), which has a similar program called RedfinNow.

Buying a home, in the end, can be an emotional decision as much as a financial one. And anyone who has ever purchased or sold a home knows the process today isn’t exactly seamless.

In a world of ubiquitous technology, the housing market remains conspicuously analog. Zillow, Redfin, and dozens of other companies have been built on the view that bringing the housing market into the 21st century is a huge opportunity.

But we believe the near-term challenges facing housing are considerable. The hardest days may still be ahead.