If you like bad puns, call it another crack in the foundation.
New US home sales dropped 2% in February, data out Wednesday showed. It was the second consecutive monthly decline (figure below).
The annual pace, at 772,000, was robust, but missed estimates. Consensus was looking for 810,000. The range, from five-dozen economists, was 750,000 to 890,000.
Note that January’s annual pace was revised lower, to 788,000 from 801,000. BMO’s Ian Lyngen called it “a slightly softer look at real estate, but hardly paradigm shifting for the market or the Fed at this stage.”
As the chart (above) makes clear, we’re nowhere near any kind of collapse, but I suppose I’d suggest the “strong” finish to 2021 may have been at least partly attributable to pull-forward, as buyers expected rates to rise following the Fed’s hawkish pivot, tipped in early November.
Mortgage rates are up dramatically (figure below). Last week, while editorializing around the largest drop in existing home sales in a year, NAR chief economist Lawrence Yun called affordability a “major challenge.”
“Buyers are getting a double whammy,” Yun said, citing higher rates and “sustained price increases.”
The good news is, rates are still very low from a historical perspective, and it looks as though prices may have peaked — knock on lumber.
February’s 10.7% annual gain for the median new home was a marked deceleration in the YoY pace of appreciation, and although $400,000 is still a daunting price tag for first-time buyers, the figure (below) suggests things are leveling off.
Supply increased 2.3% last month, and months’ supply was 6.3, among the highest readings of the post-pandemic era.
Backlogs rose, though, and while the number of new homes for sale at the end of last month was the highest since 2008, 90% of them weren’t finished and many hadn’t even been started.
As has been the case since the summer of 2020, there’s still far too much noise — too many distortions — in the data to derive anything like a clear signal. What we can say is that when the cost of financing rises for the biggest ticket item most people will buy in their lives, demand is likely to wane, especially considering the price of the asset in question is still loitering near record highs.
The US housing market needs less demand, more supply or, ideally, both. If the market doesn’t come back into balance, it’ll be left to deep-pocketed investors to take a larger and larger share, thereby ensuring more and more people never realize the dream of homeownership.
Wonder how much mortgage rate locks are driving a last push for demand. Usually they last 30-60 days
I had my home for sale in 2013, but changed my mind and held on. In 9 years, the price went up and rates bounced around every day, this latest mortgage rate explosive shock is like a dark cloud drifting along in a spring storm. Making molehills into hurricanes or people dreaming that a crash is imminent need perspective.
Here’s perspective from a 2013 story at calculatedrisk:
“Fannie Mae chief economist Doug Duncan as quoted in a NY Times article a couple of weeks ago: In a Shift, Interest Rates Are Rising
“There’s no strong correlation between interest rates and home prices,” said Douglas Duncan, chief economist at Fannie Mae.
Duncan is correct.
However, a key difference now compared to earlier periods, is that there is more investor buying. And investors will compare their returns on different investments – and rising rates will probably slow investor demand for real estate, even if they are all cash buyers. But, in general, I think rising rates might slow price increases but not lead to a decline in prices (we might see some seasonal declines).”
May you live in interesting times…..
I think investors are more tolerant of rate increases, because the value they get from the house (rent) is rising faster than inflation. Also, the institutional investors aren’t using standard mortgages.