Sales of existing US homes were down almost 24% in September from the same period last year.
That’s hardly surprising. This time a year ago, mortgage rates were loitering around 3%. The latest data from Freddie Mac, out Thursday, showed rates rose slightly from last week to 6.94%, the highest since April of 2002.
So, from the lows seen in early 2021, mortgage rates are up 429bps. It’s impossible to overstate how onerous that is for would-be home buyers. As Jim Bullard put it Wednesday, while whispering sedately to Kathleen Hays, Fed hikes have “changed the dynamics” in the housing market.
Indeed, Jim! Just as Fed easing “changed the dynamics” by making homes unaffordable on the price side (figure on the left, below), Fed tightening has now “changed the dynamics” by making them unaffordable on the financing side (figure on the right).
Congratulations to the Committee. That level of incompetence can’t be faked. It’s the genuine article.
Coming back to Thursday’s figures, the last of this week’s housing data, the pace of existing home sales in September was actually a bit better than expected, even as 4.71 million still counted as a two-year low.
Sales of previously owned homes in the US have now fallen for eight straight months (figure below).
NAR Chief Economist Lawrence Yun called it “an adjustment” attributable to “the continuous rise in interest rates.” It’s a tired joke, but I feel obligated to make it anyway: “The market’s in an itsybitsy little gully right now.”
Yun continued, “Expensive regions of the country are especially feeling the pinch and seeing larger declines in sales.”
Of course, inventories are still very low, which means properties are still getting multiple offers, and that’s supporting prices. More than 25% are selling above list, the NAR said Thursday. Yun noted that the dearth of supply is one of the major differences between now and 2008-2010. During that stretch, inventories were quadruple current levels.
Prices climbed in every region last month. The median was $384,800, up 8.4% YoY. Still, that’s 7% off the highs seen in June. Days on the market rose to 19 last month. 70% sold within 30 days.
A quick check of the latest headlines in Redfin’s news section painted a somewhat grim picture. “Home Sales, Listings Plunge Over 20% in September — Most on Record Aside From Pandemic Start,” one said. “Economic Woes Exacerbate Slowdown as Rates Reach 20-Year High,” read another.
An itsybitsy little gully.
I don’t see any way housing affordability will improve in the next decade. Either through higher prices or increased mortgage servicing costs, housing will continue to be farther and farther out of reach anyone who doesn’t already own or receives financial support from their family. The only possible way I see out of this is national housing policy that overrides local zoning laws to allow for higher density housing, but that’s never going to happen.
You could argue that less immigration over the last few years might reduce housing demand somewhat, but many of those immigrants are also the people who would be working in construction. Regardless, the housing market is a complete mess and will be so for the foreseeable future.
Time will help. Nominal housing prices may not move that much, but nominal incomes/inflation will eventually solve this problem by growing much faster than housing prices. In other words, expect real prices to drop.
When it comes to affordability though, it doesn’t matter if real prices drop when interest rates have gone up substantially. The monthly payment on a mortgage, which is still how most people pay for a house, has been outpacing inflation by a wide margin, so without a substantial drop in nominal price, affordability is still getting worse.
On the flip side, If interest rates do drop, I’d actually expect real prices for homes to keep pace or even outpace inflation. It’s a “damned if we do, damned if we don’t” situation, and the only cure is new supply which is also not improving. We might see a temporary dip in prices from new supply that builders already had in the works, but I don’t think it’ll take long to cycle through that inventory.
I am willing to wager that nominal prices will lag incomes and inflation due to affordability. Interest rates fluctuate too. After incomes catch up, prices can go up again. We just had 5 years of nominal growth squeezed into 18 months. It will likely take 4 years or more to rebalance housing prices and demand.
Unfortunate but inevitable 10 years from now there will be many less baby boomers in large homes. Combined with a probable (economically necessary) shift back to dense urban settings (and some new construction of large apartment complexes).
Also, with many people unable to independently cope with climate change effects (wildfires, hurricanes/flooding, droughts, etc) they’ll converge into areas that are deemed safer and with pooled resources have better mitigations.