Another day, another data point (or two) to suggest the previously red-hot US housing market is rapidly cooling in the face of sharply higher mortgage rates, elevated inflation and recession concerns.
Sales of existing homes in the US fell a fifth consecutive month in June (figure below), the NAR said Wednesday.
The 5.12 million annual pace was the least in two years, and came in well below estimates.
May’s 5.41 million rate was unrevised. Sales are now running lower than they were throughout 2019, and were down more than 14% compared to June of 2021.
There’s no mystery. “Falling housing affordability continues to take a toll on potential home buyers,” NAR Chief Economist Lawrence Yun said Wednesday. “Both mortgage rates and home prices have risen too sharply in a short span of time.”
This is a broken record, but I’d be remiss not to reiterate: The rhetoric has shifted materially over the past several months, and not because of unforeseen circumstances. This was entirely predictable. The Fed was plainly determined to cool the housing market after six consecutive quarters during which the value of household real estate rose by $1 trillion or more, mortgage rates began to rise months ago and house prices were stratospheric. The red bar in the figure (below) represents the first quarter of 2022, when a $1.7 trillion increase in property values partially offset a $3 trillion hit to households’ equity holdings.
Throw in a brutal cost of living crunch precipitated by the surge in food and gas prices that accompanied Russia’s invasion of Ukraine, and the die was cast. No other outcome was possible. Affordability was bad enough coming into 2022. Homes are now entirely out of reach for a non-trivial segment of the population. It’s just that simple.
And yet, for at least two months, much of the color commentary revolved around a single talking point which suggested a dearth of supply, by itself, would be sufficient to support the market. So much for that.
To be sure, prices remain buoyant. The median existing home price in June was $416,000, the NAR said. Prices rose in all regions. The YoY pace of appreciation, though, was 13.4%, cooler than May’s initially reported 15%, and nowhere near to 20%+ gains we’ve become accustomed to on some closely-watched indexes. It was the 124th straight month of YoY price appreciation.
Despite the decline in sales and price gains, homes sold faster than ever. Properties were on the market for just two weeks in June, the fewest since NAR started compiling data more than a decade ago. 88% of homes sold were on the market for less than a month.
To his credit, Yun did an admirable job of encapsulating the contradiction(s). He also offered a concise explanation. “There are more homes on the market [but] the record-low pace of days on market implies a fuzzier picture on home prices,” Yun said, in a press release. “Homes priced right are selling very quickly, but homes priced too high are deterring prospective buyers.” That suggests the days of sellers naming their price and immediately receiving offers far above asking, are probably over.
Meanwhile, an MBA gauge of mortgage applications dropped to a 22-year low in the week to July 15 (figure below). The index includes refis.
“Purchase activity declined for both conventional and government loans, as the weakening economic outlook, high inflation and persistent affordability challenges are impacting buyer demand,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, said, adding that “the decline in recent purchase applications aligns with slower homebuilding activity due to reduced buyer traffic and ongoing building material shortages and higher costs.”
Wednesday’s data came on the heels of a very poor read on homebuilder sentiment and lackluster housing starts figures, which showed single-family activity receding to a two-year nadir.
Bottom line: You can consider this bubble properly popped. The question is what comes next. The NAR’s Yun weighed in. “If consumer price inflation continues to rise, then mortgage rates will move higher,” he remarked. “Rates will stabilize only when signs of peak inflation appear.”
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Hmmm….sales down (only) 14% from a year ago when the covid-inflated market was raging? And prices only UP 13.4% ? Certainly at least the bubble’s pace of inflation (pun intended) is decelerating, and I fully expect that to continue, and flatten further, and in many markets turn into at least a correction. But there is still a lot of unfulfilled demand (even among those who still can afford it), while the builders’ pessimism indicates even further contraction in (new homes) supply.
Much is yet to be determined – in terms of the course of mortgage rates thru the rest of the year (already down off their highs, along with most long-term rates), with a lot of uncertainty as to the length and depth of further tightening and the severity of economic contraction that will accompany it. The Fed could blink or be successful in engineering a soft landing, mortgage rates could decline further and stabilize (at what are still historically modest levels) and flattening prices with continued limited supply could result in a normalized market (or not!). So while I wouldn’t venture any firm prediction I certainly would not (yet) consider “the bubble properly popped”.
Right. And as much as I enjoy having a laugh at the expense of (nearly) every hedge fund manager on the planet, this is what separates the handful of household names from the countless nobodies who couldn’t get a CNBC cameo if their lives depended on it: If you can only identify a “properly popped” bubble once the evidence is incontrovertible, then you’re never going to have that big score that allows you to be wrong about everything else for the rest of your life and still be considered a “legend.” It’s not the case that “being early is the same as being wrong.” Being too early is the same as being wrong. Being early is a prerequisite for being right. Everyone can be “right” in hindsight. Even getting something as simple as the homebuilder ETF trade right required jumping on it before the first Fed hike and months before the data started to crack. Even if it’s not too late now, you’ve already missed more than 1,000bps worth of underperformance to the S&P.
Forgive me, but calling a property bubble burst once house prices have already started declining is like calling a car broken once there’s already smoke coming from under the hood. Sure, you’re a little early — prices haven’t bottomed and the car is still drivable — but you’re not going to make any real money with those kinds of calls.
3 months ago was the inflection point. Clearly prices are flat and in some markets declining. Turnover, which is key is lower, and with low turnover, inventories will tend to build up. We are in the inventory build up phase- the real price correction is to come. The reason I would disagree with the bubble characterization for residential real estate is that different markets around the country are diverging. Some of the moonshot markets are/were in bubble territory, and those are popping now, and may correct substantially. Other markets may flatten or even decline but not nearly as much as the moonshot markets.
In other words, the correlations in residential real estate are still muted- if they went to 1 you know you are in a bubble that is correcting nationwide.
Good article, good comments…How about bad-terrible policy in mortgages for a very long time….This has set up a future day of reckoning..What percentage of single home mortgages are owned by the government…The jumbo market is a source of inflation in my opinion…Will there be a schadenfreud moment here?