Housing Inventory Rose 13% in May -- but Buyers Shouldn't Celebrate Just Yet

It's a positive sign, but the market is still tough right now.

Home prices have been through the roof for well over a year now -- and buyers are growing increasingly frustrated as a result. In May, the median home price reached $407,600 -- up almost 15% from one year prior, per the National Association of Realtors (NAR). And there's a reason home prices have gotten so high: inventory is still very low.

Any time there's inadequate supply of a given commodity to meet demand, the price of that commodity is apt to rise. That's precisely what's happened in the real estate market. Because there's been a glaring lack of housing supply, sellers have been getting away with commanding sky-high prices.

Meanwhile, NAR reports that housing inventory rose almost 13% in May compared to April. And that's definitely good news. But buyers shouldn't breathe a sigh of relief just yet, because we still need a lot more inventory to create an equalized housing market that doesn't give sellers a distinct upper hand.

Housing supply still needs to catch up

As of late May, there were 1.16 million unsold homes, according to NAR. That represents a 2.6-month supply at the current monthly sales pace.

That's an improvement from April, at which point there was just a 2.2-month supply of available homes to be purchased. But May's numbers are still way shy of what's needed to create an equalized housing market. It generally takes at least a four-month supply of homes for a market where buyers and sellers are on equal footing. And so clearly, we still have a long way to go.

When will housing inventory pick up?

A big reason housing inventory remained low in 2020 and 2021 was that sellers didn't want to change their living situations at a time when there was so much pandemic-related uncertainty. At this point, Americans are learning to coexist with COVID-19, and that could influence seller behavior in the coming months.

Also, mortgage rates have been rising at a rapid pace since the start of the year. And as the Federal Reserve moves forward with rate hikes, mortgage interest rates could get even higher. That could motivate sellers to list their homes, the logic being that they want to put their properties up for sale before buyers are forced to pull out of the market due to affordability issues. And so we could, conceivably, see a nice uptick in inventory by the end of the year.

But will we reach the point of having a four-month supply of homes? That's questionable. Ultimately, it's hard to predict seller behavior, and the trajectory the pandemic takes might also play a big role in inventory as it no doubt has in the past.

Those looking to buy a home should stay vigilant and keep tabs on the market. But they should also anticipate higher borrowing rates as 2022 moves along.

However, if enough homes hit the market, prices could start to come down in a meaningful way. And that could be a great way to offset the higher mortgage rates buyers could soon be in for.