Existing home sales dropped 2% in August, while prices rose sharply from last year, a largely inline read on the US housing market showed.
Wednesday’s data wasn’t going to move any needles given the proximity of the FOMC meeting. Nevertheless, every incremental data point on housing is arguably worth a mention considering the extent to which pandemic dynamics combined with the Fed’s bond-buying to create a veritable funhouse mirror.
Economists expected a 5.89 million pace for last month. And that’s almost exactly what they got. Existing home sales ran at a seasonally adjusted annual rate of 5.88 million in August.
The decline from July was the first in three months (figure above).
As ever, prices are a factor. The median price rose almost 15% YoY to $356,700, NAR said.
“Sales slipped a bit in August as prices rose nationwide,” Lawrence Yun, NAR’s chief economist, said, in a press release. “Although there was a decline in home purchases, potential buyers are out and about searching, but much more measured about their financial limits, and simply waiting for more inventory.”
As a reminder, Americans aren’t particularly enamored with the current situation. According to the preliminary read on University of Michigan sentiment for September, consumers are chafing at price increases. “The decline in assessments of buying conditions for homes, vehicles, and household durables left all three near all-time record lows, with the declines due to spontaneous references to high prices,” the survey’s chief economist Richard Curtin remarked.
Read more: Consumers See ‘Least Favorable Prospects In A Decade’
Critics have urged the Fed to taper MBS purchases quickly in order to remove at least one factor blamed for exacerbating price increases.
Of course, it’s not just the Fed. There’s a supply problem too. Pandemic dynamics not only pushed up prices for key inputs (like, you know, wood), but also stoked near insatiable demand as renters fled cities for the suburbs amid record-low mortgage rates and a deadly airborne pathogen.
Some believe it’s just a matter of time before surging prices start to “show up,” so to speak (figure below).
Inventories of existing homes fell in August. There’s now a 2.6-month supply assuming the current sales pace. The share of first-time buyers dropped to 29%, the lowest since 2019.
Yun stated the obvious. “High home prices make for an unbalanced market, but prices would normalize with more supply,” he said.
87% of homes sold in August sat on the market for less than a month.
There’s some year-end seasonality at play here, but, the tsunami of baby-boomers and an emerging surge of younger folk that want places — will continue to engage in excess post Covid demand shocks. As the edge of winter takes form, the forces of demographic dynamics will expand — and the tsunami of money flow will push housing prices further up. I assume that bidding wars in select places will continue, because there’s so much competition — and with massive portfolio gains by many, adding 10 or 20% (+) over asking price is not gonna stop the trends (firmly) in place. Just because the average person can’t play this game, doesn’t mean there’s a lack of serious players ready and waiting to get what they want. There is no normal or historic range for nonlinear spikes and there doesn’t need to be instant equilibrium. The only thing to prick this bubble will be a serious recession and even though lots of things seem broken or weird, a recession seems fairly unlikely any time soon.
And the key thing there is that even though a recession may pop the bubble… it doesn’t mean cheap affordable housing will be readily available during or after it. Say Covid Gamma levels the economy and people are selling houses at firesale prices as they lose jobs… institutional investors would gobble up the properties to turn them into rentals while people attempting to buy in will largely not have access to capital. Post recession the available quantity of homes is even smaller and the demand due to those who sold returning to the market along with new buyers aging into the market along with a lack of any investment into affordable housing construction means an even larger bubble next time.
Labor costs must be marching up as well. Partly thanks to caps & crackdowns on immigrants.
But that’s what they sought. “By chasing out immigrants, US wages will rise” they promised. And so they are.
I like the way you think. Your comments are generally quite sensible.
Here’s a recent data point from the Triangle region of NC. Just completed (last week) buying a house for our daughter and her fiance. I felt I got off light by only paying 108% of asking by offering to take it “as is”, all cash, two week closing. There were 6 bids. I estimate I need to put $20 – 25 K of repairs/cosmetic work into it before move in, so let’s call it 114% of asking. This is for a 1650 sqf, 3 br, 2 bath, no garage house in a pleasant neighborhood of mid 80’s vintage.
The market had been hot in the first months of the year, but really took off in May. Since then, every house that sold in that area went at 110 to 120% of asking. Growth and inward migration are strong locally. Lots of deferred demand, restricted inventory. If it weren’t for intergenerational wealth transfer, these “kids” (early 30’s both employed), would still be renters.
This from Calculatedrisk, which has a very nice chart:
Fed’s Flow of Funds: Household Net Worth Increased $5.9 Trillion in Q2
Mortgage debt is up $573 billion from the peak during the housing bubble, but, as a percent of GDP is at 49.6%, down from a peak of 73.3% of GDP during the housing bubble.
To me, this shows plenty of upside for home values ahead. The obvious obese elephant in the room is future rental costs for the average person, who doesn’t own real estate. The only way renters will make it, in the future is to share more space with other renters; as a landlord that isn’t ideal, but if rents keep climbing, landlords will have to adjust to market demands. Furthermore, if your a landlord, the number of people per capita that can afford exploding rents will shrink and threaten cashflow. In addition, how does that type of risk play out, with multiple renters under your roof, with multiple pets, smokers and tenants that will destroy a place? As rent goes higher, there has to be some longer term black swan in the wings, but that may be many years away …