More cracks in the foundation. Pardon the pun. Again.
Two days after data showed new home sales fell more than expected in February, pending home sales missed the lowest estimate from two-dozen economists.
Sales fell 4.1% last month, the NAR said Friday. The most pessimistic forecast called for a 3.5% decline.
It was the fourth consecutive monthly drop (figure above), and brought the index near a two-year low. Contract signings were down in every region but one on a monthly basis, and lower in all regions YoY.
NAR chief economist Lawrence Yun blamed scant inventory, but conceded that affordability is now a very real problem. “Buyer demand is still intense, but it’s as simple as ‘one cannot buy what is not for sale,'” he said Friday, before noting that “the surge in home prices combined with rising mortgage rates can easily translate to another $200 to $300 in mortgage payments per month, which is a major strain for many families already on tight budgets.”
Mortgage rates rose again this week, reaching the highest since January of 2019 (figure below).
If you’re keeping track, that’s 57bps in two weeks.
With prices loitering near record highs, the cost of borrowing rising rapidly and prospective buyers facing higher prices for food and gas, the outlook is increasingly cloudy. Note too that the Fed’s efforts to unwind the balance sheet will impact the market.
“Russia’s aggression in Ukraine is also likely to affect global oil supply, imposing further burdens on inflation and bringing about more aggressive rate hikes,” the NAR said last month. It’s a perfect storm.
In a press release accompanying January’s numbers, Yun suggested one silver lining going forward might be a flight to safety in oversold Treasurys. “There’s also the possibility that investors may flee toward safer US Treasury bonds, which may result in temporary short-term relief to interest rates,” he remarked, several weeks back.
Global bonds are experiencing their biggest drawdown on record. 10-year US yields hit 2.50% on Friday.
The storm clouds I see on the horizon indicates increasing home prices linked to substantial increased demand for limited supply. Interest rates will be meaningless and either stagflation or recession are unlikely to build a barrier within next two years. Rate of increase for price will decline somewhat, but it’s still an environment for bidding wars between people with deep pockets.
A recent snip from altos:
“Last year inventory bottomed seasonally in April 2021 – very late in the year. This year, by this measure, it appears inventory bottomed seasonally at the beginning of March (we need a few more weeks of increasing inventory to confirm this).
Inventory is still very low. Compared to the same week in 2021, inventory is down 21.7%, and compared to the same week in 2020, and inventory is down 65.9% from 730 thousand.”
Thanks Oldbird. Some interesting stats there. Were the stats similar in 2007-2008?
You inventory shifted from about 40 percent around 2006 2007, falling to to around 10 percent near 2008, continuing to crash to negative 25 percent through 2012 2013.
In that same timeframe, months of supply for 2006ish was near zero and then floating to around 30 percent through 2013.
Currently inventory is about or near negative 10 percent and months of supply about negative 20 percent.
The dynamics today are night and day.
In regard to fewer sales, I think that just indicates, less inventory and higher prices.
I also think that if mortgage rates go to 7 percent, investors looking at cash flow will ponder locking up their cash in treasure stuff, but then there’s the flip side related to less investment in building new inventory.
The aggressive nature of investors in this market isn’t going to be deterred by the Fed attempting to rattle markets with jawboning and their inability to liquify their frozen toxic mbs.
As far as first time buyers, some of those that are willing to take on risk, to compete, they’ll need to find new ways to combine assets in partnership style arrangements, unless they’re willing to wait this cycle out, and then be able to leverage down payments on more affordable stuff. I doubt they’ll have patience!
Oops, redoing that due to my smartphone, brain limitations, didn’t see correct axis, sorry!!
2007 YOY change in inventory =+40%, which is now closer to -4%
2010 months supply was about 12% and that’s approximately -2%.
I don’t even know if that’s up to date.
In the future I’ll find some credible source to copy paste.
“ Interest rates will be meaningless”?
If interest rates hit 7 or 8% people will not be buying $400K starter homes like they are doing now.
If interest rates hit 5 or 6% people will not be buying $400K starter homes like they are doing now – FIFY
Interest rates are one factor input in home sales. Demographics and incomes are probably each equally important factors if not more so. And of course lately lack of supply has influenced sales volumes. Demographics are positive for single family sales, incomes probably neutral, interest rates a drag and supply a drag. Mixed bag and of course there are regional differences in all of these. Outside of the slower growing Metro areas, you can expect prices to increase at a decent clip. Some of the slower growing areas with high prices not so much….. ny and sf metros are probably 2 of those areas…..you can also observe that prices won’t adjust right away, inventory has to build first. So if we are going to see a nationwide price correction especially, that won’t be evident for at least a couple of quarters. You can probably expect that a national correction will not happen. A healthy market has regional differences and low cross correlations- and the market is pretty healthy except for low supply. I do think it is safe to say that the days of double digit increases nationwide are over.
RIA,
Agree, but some areas still may go over 10%
““With so much uncertainty in the world and economy, it makes sense that homeowners are staying put,” said Redfin Chief Economist Daryl Fairweather. “High prices and rising mortgage rates are a strong impediment even for homeowners who would ideally like to move to a better home. First-time homebuyers, on the other hand, are still seeking the security of homeownership despite the chaos of this market”
Perhaps this is a case of “don’t fight the Fed”
Bottom line, this doesn’t strike me as being anything close to a bubble and I think we have a lot of room to run upwards.
I just ran a fast random chart on Fred for all home transactions,, it serves a purpose for an example.
In defense of current prices, consider home prices around 2012 that were about $312,860, which are now close to $557,730, thus a ten year gain of say 77%.
Now go back to 1996 when homes were about $193,580 which went to around $368,760 near 2006, that’s a 90% increase.
What bubble? Will the explosive pandemic rate be sustainable, no way, but, no way we have a fire sale for a very long time. Our generational fire sale was after the GFC and I seriously doubt we’ll see another meltdown anytime soon
I agree Oldbird. Iin the late 90s I recall buying 8 foot 2x4s for less than $2, and a sheet of OSB for $4. Lumber, copper, cement, etc prices are through the roof right now.
Labor is constrained by strict immigration and border policies. Labor is also constrained by Millennials/Get Z not very interested in blue collar trades. Building codes and fees are all stricter, better enforced, and more expensive now than ever. Can housing prices fall? Sure. Very much? Not with all the above putting a floor under prices
Fed knows that if shelter inflation doesn’t ease, overall inflation will be very hard to bring down. Its only lever is on house price, it lacks any lever on rents. So house prices have to stop going up. Fed’s lever there is a potent one. QT with active focus on MBS could get mortgage rates into high single digits. Mortgage rate rising from 3% to 7% increases monthly payment by over 50%. There is no way that doesn’t hit demand, hard, for buyers using mortgages. Buyers with cash, or investors, may have a different calculus, so maybe they get the benefit of lower price and less competition.
Great points jyl. Especialy the last sentence.
Jyl,
I think the investors and cash backed buyers will be a strong presence going forward, but sadly, I agree with you that substantial increases in mortgage rates will be a cancer for housing. However, if mortgage rates are kike chemotherapy, there’s the obvious risk of killing patients and then sending families into bankruptcy as they look for ways the needle. Something there about a camel threading a needle?
As far as MBS, that’s a very complex issue and almost as weird as unwinding Fannie, there’s a lot of very screwed up plumbing that’s been going on for 30+ years. I don’t see the Fed or treasury being able to reinvent the mess in place, it just has to slowly unwind.
“The overwhelming majority of buyers, 87%, took out mortgages to finance their homes. They were helped by record-low mortgage rates, which fell to the mid-2% range in late 2020 and early 2021. (Rates have since shot up over 4% on 30-year fixed-rate loans, according to Freddie Mac”
I think 19%, of buyers recently have been single women…