An Itsy Bitsy Little Gully
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 w
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.