US Housing Bubble Reaches Inflection Point

US mortgage rates fell below 5% for the first time since April last week, but it’s small comfort to a shellshocked market. If the Fed has any sense about it (a debatable proposition), policymakers will continue to lean against America’s property bubble.

If you’re Jerome Powell, one problem with the perception that a decelerating economy will prompt a premature pivot away from aggressive policy tightening is the risk associated with falling mortgage rates.

The surge in financing costs over the first half of 2022 was both historic and necessary. Ever higher home prices pushed up inflation in a number of ways, not least of which was the (lagged) read-through for CPI shelter gauges. Additionally, the wealth effect from six consecutive quarters of trillion-dollar gains in the cumulative value of US real estate encouraged early retirements, which impacted the labor market on both sides: It removed workers and put more strain on an already stretched services sector, where retirees tend to spend money.

Given the above, the Fed shouldn’t be enamored with the recent drop in mortgage rates, which logged very large declines in three of the last five weeks (figure below).

Even the idea of an incrementally less hawkish Fed could be enough to push rates sharply lower from this year’s highs, catalyzing a new wave of buying, as sidelined house hunters rush to lock in rates — buying the dip, as it were.

Any renewed appetite would, like the rebound in equities, work at cross purposes with policymakers’ efforts to curb inflation, even if lower rates could revive refi activity with constructive implications for MBS runoff.

For now, perceptions of buying conditions remain dire, which is just what the Fed needs, and probably just what the Fed wants, even as they wouldn’t put it quite that way. A Fannie Mae index of consumer housing sentiment dropped to the lowest in more than a decade in July, the agency said this week. Last month’s two-point decline took the index to 62.8, down dramatically from a year ago (figure below).

The share of consumers who said getting a mortgage would be easy for them increased one percentage point to 48%, while the share of those who said it’d be hard dropped two percentage points. The spread between the two turned negative for the first time in seven years in June.

In the same survey, the percentage of respondents who said it’s a good time to buy sat at 17%, while those who judged the environment unfavorable remained exceptionally elevated, leaving the net “good time to buy” gauge loitering near the lowest in data back to 2010.

Of course, markets are comprised of buyers and sellers. When the former are feeling especially glum, their pessimism can be contagious, given that any associated drop in demand equates to less leverage for latter. “Unfavorable mortgage rates have been increasingly cited by consumers as a top reason behind the growing perception that it’s a bad time to buy, as well as sell, a home,” Doug Duncan, Fannie Mae’s Senior Vice President and Chief Economist, said, noting that the percentage of surveyed consumers saying it’s a good time to sell has “declined meaningfully” since May.

On Monday, Bloomberg published an amusing piece documenting the situation in San Francisco, one of the most notoriously overpriced housing markets on the planet (with a polite nod to my sizable Canadian readership and anyone reading Down Under, to acknowledge your truly impressive accomplishments on the property bubble front).

In the linked article, John Gittelsohn described “a palatial five-bedroom home built in 1932 with stained-glass windows, hand-carved doors and jaw-dropping hillside views of downtown” that went on the market in April for $9.5 million. Fast forward just three months and there were no offers at an auction with an opening bid less than half the original listing price.

According to Redfin data, prices in San Francisco actually fell on a YoY basis in June (figure above). It was the only major US city to see a decline, but if supply trends are any indication, it won’t be the last.

In a separate article, Redfin’s Dana Anderson detailed a sharp rise in so-called “stale” listings. The share of US homes on the market for 30 days or longer without going under contract rose almost 13% last month versus the same period in 2021. “That’s the first YoY increase in ‘stale’ housing supply since the beginning of the pandemic and close to the biggest uptick in Redfin’s records, which go back to 2012,” Anderson wrote, adding that “the only time it increased more was in April 2020, when the housing market nearly ground to a halt.”

Meanwhile, Realtor.com said this week that the national inventory of active listings rose 31% YoY in July (figure below). That was “the largest increase in inventory in the data history and higher than [June’s] growth rate of 18.7%, which was itself record-breaking,” Sabrina Speianu, the site’s economic data manager, said. The increase meant more than 175,000 more homes were actively for sale on a typical day in July versus last year.

The same data showed total listings posted a YoY increase for the first time since 2019. That too is illustrated in the figure.

There’s a long way to go. We’re nowhere near “normal,” something Speianu underscored. “Active listings lag their pre-pandemic and even early-pandemic level,” she wrote Tuesday, noting that “the number of active listings in July was 15.7% below 2020 and 45.4% lower than the pre-pandemic 2017-2019 average.”

Still, this could become a self-fulfilling prophecy. And rather quickly at that. “With home price growth slowing, and projected to slow further, we believe consumers’ reaction to current housing conditions is likely to be increasingly mixed,” Fannie Mae’s Duncan remarked. “Some homeowners may opt to list their homes sooner to take advantage of perceived high prices, while some potential homebuyers may choose to postpone their purchase decision believing that home prices may drop.”

As regular readers will attest, I’ve been steadfast in the contention that very much contrary to the consensus narrative, America may have a housing glut, not a housing shortage, thanks to spec builders’ frantic efforts to keep up with demand post-pandemic. On Tuesday, Bloomberg ran a piece with this title: “Builders Are Stuck With Too Many Houses.”