‘Simply Squeezed’: Surging Prices Finally Bite US Housing

Existing home sales fell again in May, even as the pace was a marginal beat versus consensus.

The 5.8 million annual rate was the lowest in a year, but slightly better than the 5.73 million pace the market expected. The range, from more than five-dozen economists, was 5.57 million to 6 million.

May’s drop marked the fourth consecutive monthly decline (figure below).

At this point, nobody seems particularly interested in dodging the obvious: Soaring prices are gradually eroding demand.

For the duration of the post-pandemic era, record-low mortgage rates and COVID dynamics (e.g., the proliferation of work-from-home arrangements and a flight to the suburbs) were enough to keep buyers engaged despite an inexorable rise in prices (figure below).

Now, though, affordability is becoming an issue. The median existing-home price jumped a record 23.6% YoY in May, NAR said Tuesday.

“Home sales fell moderately in May and are now approaching pre-pandemic activity,” Lawrence Yun, NAR’s chief economist remarked. “Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.”

The median existing home price last month was $350,300. Every region saw an increase. Prices have increased for 111 straight months on a YoY basis.

Although inventory rose from the previous month, supply was nearly 21% below levels seen in May of 2020. Unsold inventory amounted to 2.5 months of supply. That figure was 4.6 a year ago. Properties sat on the market for just 17 days last month.

In my view, it’s not realistic to expect that Americans will continue to buy homes when the median price is $350,000 or more. I’m admittedly out of touch, isolated as I am, but I have to believe the country is close to exhausting the pool of potential buyers who can afford to pay that (or more) for a house.

This is an unapologetically simplistic take, but it’s difficult for me to imagine how prices can keep moving higher from here unless lenders start to materially relax their standards, which seems unlikely just a dozen years on from the housing crisis. Lumber prices are ~40% off their peak, it sounds as if buyers are now beginning to get priced out and there’s really nowhere for mortgage rates to go but up.

Housing trends are not my area of expertise, but this seems fairly obvious.

Read more:

Bubble Watching In US Housing

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6 thoughts on “‘Simply Squeezed’: Surging Prices Finally Bite US Housing

  1. From what I have read, the credit rating for people trying to buy homes is still high. If you read what builders said last qrtr, they were laying foundations and waiting on a lumber dip. There should be more and more buying as houses are completed later this year bc builders got their dip. Pretty convient that this happened right before peak building season. Builders can stomach higher prices. They cant stomach out of control volatility of building materis. I think bigger builders will try to buy the top smaller builders especially those that build smaller homes in sunbelt/colorado. KBH reports soon.

  2. While the average American may not be able to afford 350k the average property investor can. And can make their nut renting it out as long as their mortgage rates are low.

  3. What you folks are describing isn’t sustainable. The larger the footprint of speculators and “investors,” the more volatile the situation is likely to be. Obviously, real estate can be a great investment, but treating houses like stocks or pseudo-bonds (only with coupons that depend on the increasingly precarious life trajectory of renters, whose economic prospects are notoriously difficult to project), isn’t likely to end well. Those folks don’t have any attachment to the market outside of a financial interest, which means as soon as things go wrong, they’ll look to sell, and before you know it, you’ll have people selling into a falling market (with a long way down thanks to the run-up in prices). While falling prices could help on the affordability front for people who actually intend to live in the homes they buy, nobody wants to think they’re catching a falling knife. A Fed pullback from the MBS market (or any other tightening maneuver) could act as an additional headwind.

    1. The last point is undoubtedly true and I’m all for it. Though from some of your other recent posts i got the impression you may not be in that camp.

  4. One thing to keep in mind, is that when a homeowner takes advantage of a rising housing price market and sells to then in turn buy a new home at a lower price because it’s in an area of lower demand and to pocket the difference to lower his housing indebtedness he is displacing another homeowner who may also be moving even farther from high demand to also pocket the difference and lower his indebtedness. The pool is a very mixed bag.

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