I Can Get You In Something Used For $407,600

It could’ve been worse.

Existing home sales fell last month, the first of this week’s key US housing data showed. But the decline was no larger than expected, a small miracle considering how quickly financing costs are rising.

Sales fell 3.4% to a 5.41 million annual pace, the slowest in almost two years, but in line with consensus. The range of estimates, from more than four-dozen economists, was 5.2 million to 5.92 million.

April’s drop was revised slightly lower. May marked the fourth consecutive monthly decline (figure above).

On a YoY basis, last month’s drop was almost 9%. “Home sales have essentially returned to the levels seen in 2019, prior to the pandemic, after two years of gangbuster performance,” NAR Chief Economist Lawrence Yun said Tuesday.

The data was the latest piece of incremental evidence to suggest the US housing market is cooling. Investors will eye an update on weekly mortgage applications Wednesday and new home sales figures due Friday for more clues about the impact of sharply higher rates on buyer psychology.

Mortgage rates rose the most since 1987 last week (figure below).

The rapidity of the increase in 2022 is unprecedented. Rates have nearly doubled since late last year.

Also unprecedented are prices, which continue to rise. Although new home sales plunged in April, prices staged an almost parabolic ascent, presumably as buyers rushed to lock in rates. Tuesday’s data showed the median price of existing homes rose 14.8% from a year ago, crossing the $400,000 threshold for the first time in the process. The median existing home price in May was $407,600. It was the 123rd consecutive YoY increase.

Inventories rose nearly 13% from April, which is helpful, even as the 1.16 million units is lower versus this time last year. “The uptick in homes for sale largely reflects seasonal factors rather than panic listings,” Bloomberg’s Cameron Crise wrote. “Activity is clearly slowing, but until there’s a more vigorous supply response prices may not adjust terribly quickly.”

Notably, Capital Economics now sees nationwide prices falling 5% by mid-2023. That may not sound like a particularly bold call, but as far as I’m aware, predictions for across-the-board declines are still few and far between despite very challenging circumstances for would-be buyers squeezed by surging mortgage rates, record high prices and rising costs for necessities. Eventually, that conjuncture will crimp demand. When it does, sellers will either accept lower offers, or sit on unsold properties.

Shares linked to housing are beset. The index behind the popular XHB ETF is down 40% in a very compressed time frame (figure below).

The S&P Supercomposite Homebuilders gauge is on track for its worst annual loss since the eve of the financial crisis.

Some readers have been keen to suggest that as long as investor demand remains robust, prices will stay firm. That’s true, but it’s not lost on investors that “regular” buyers are facing onerous macro circumstances, nor are they (investors) oblivious to what that means for sellers. If investors believe natural buyers are being priced out of the market, they’re likely to drive a harder bargain.

But that’s a story for another day. Or maybe not. Builders are already slashing prices across the country, according to a rising tide of media coverage. “The writing is on the wall that more supply is coming, no matter how you slice and dice the data,” one researcher told Bloomberg, for an engaging piece published last week. “We could have the double-whammy of the economy cooling and a lot of supply coming on… not the best recipe to sell homes.”

Lennar, which reported earnings on Tuesday, said it’s beginning to lower prices in some regions. “While our second quarter results demonstrate strength and excellent performance throughout the quarter, the weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider,” Executive Chairman Stuart Miller said, adding that “the Fed’s stated determination to curtail inflation through interest rate increases and quantitative tightening have begun to have the desired effect of slowing sales in some markets and stalling price increases across the country.”

Still, prices are likely to keep rising in aggregate, albeit at a slower and slower pace, as the comps get more challenging alongside a deteriorating macro backdrop. The NAR’s Yun expects “further sales declines” in the coming months. Nevertheless, he remarked, “homes priced appropriately are selling quickly and inventory levels still need to rise substantially — almost doubling — to cool home price appreciation.”