4 Signs the Housing Market May Be Bottoming Out As Supply Improves: NDR

Good news for prospective homebuyers: It looks like the scales in the housing market are finally starting to tip in the right direction.

In a recent note to clients, Ned Davis Research said it saw a handful of “encouraging signs” that the US housing market could finally be bottoming. That’s another way of saying that homebuying activity could soon start to rebound, after years of prospective buyers being sidelined by high mortgage rates and record-breaking home prices.

Sellers are outpacing buyers at the highest pace in more than a decade — a testament to how frozen the housing market has become. The market now has 36% more home sellers than buyers, according to an analysis from Redfin — the largest seller-buyer mismatch recorded since at least 2013.

But the situation is showing the following four signals of unwinding:

1. Supply is starting to come into better balance

The shortage of supply relative to demand is on track to be reduced this year, according to NDR’s analysis of Commerce Department data.

The research firm expects the US to add around 1.3 million units in fresh housing supply this year.

Annual demand for housing, meanwhile, is set to slow to around 850 million units, thanks to a “sharp slowdown” in household formation, Joe Kalish, the chief macro strategist at NDR, said in the note.

In sum, that puts the housing market on track to be 1.1 million units short by the end of the year, per NDR’s estimates. That compares to the housing shortage at the start of the year, which stood at around 1.6 million.

Limited housing supply has been a major factor pushing home prices higher over the last five years. Any improvement in the housing shortage is expected to provide at least small relief to homebuyers.

2. Housing vacancies are normalizing

Rental and homeowner vacancy rates have been climbing in recent years — but the proportion of rental and home units on the market that are vacant are expected to return to their historical norms this year, NDR said.

“An alternative methodology shows the rental vacancy rate now matches our assumption of normal at 7.0%. we also assumed a normal homeowner vancancy rate of 1.5%,” Kalish wrote.

Properties that are left vacant have been another factor limiting the supply of available housing. One LendingTree analysis this year estimated there were around 14.9 million vacant homes in the US.

3. Home prices relative to income is falling

The median existing home price relative to median household income — one measure of housing affordability — now looks to be falling from a historical peak, according to NDR’s analysis.

At its peak, the median home price to median housing income ratio stood at around 5.4, higher than it was during the peak of the housing bubble in 2006. Since, that ratio has cooled to 4.9, Kalish said.

The median sales price of a US home dipped to $410,800 at the end of the first quarter, according to US Census Bureau data, down from a peak of $442,600 in 2022. Real personal income, meanwhile, has climbed around 5% over the last five years, according to the Bureau of Economic Analysis.

4. Housing is getting cheaper relative to replacement costs and stocks

Housing is also getting cheaper relative to replacement costs and stocks, NDR said — another sign affordability is headed in the right direction.

The value of household real estate relative to replacement costs eased to 169.5% at the end of the first quarter, per the firm’s analysis.

Replacement costs are rising due to tariffs and immigration deportations, Kalish said, which economists have said could raise the cost of wages.

The value of household real estate relative to the stock market capitalization of domestic corporations also eased to 69.8% at the end of March.

“In sum, the housing market is coming into better balance. Prices are expensive but house price growth is slowing,” Kalish added.