The last of this week’s key housing market data was dastardly.
Maybe that’s hyperbole. I’ll leave that judgment to readers.
What I can say with certainty, though, is that the 10.2% decline in pending home sales the NAR reported for September on Friday was far worse than economists expected (figure below).
In fact, not a single forecaster out of two-dozen who ventured a guess was anywhere close. The most pessimistic estimate called for a 7% decline. One economist saw a slight gain.
That’s bad news. Pending home sales are a leading indicator. Properties go under contract a month (at least) before they’re sold. Every major region saw a decline in September, including a 16% drop in the Northeast.
NAR Chief Economist Lawrence Yun spoke in deterministic language Friday. Thanks to the “drastic” jump in rates, there are “far fewer buyers and even fewer sellers,” he said.
On a 12-month, unadjusted basis, pending home sales in September plummeted more than 30% (figure below).
That was the biggest drop since April of 2020, when the pandemic lockdowns plunged the world’s largest economy into a short-lived depression.
The numbers came on the heels of mixed new home sales data and price figures for August which betrayed the largest deceleration in the pace of price gains on record alongside consecutive monthly decreases.
Mortgage rates hit 7.08% this week, according to Freddie Mac. That was a new two-decade high.
The rapidity of the increase continues to amaze (figure above).
If you ask the NAR’s Yun, this situation isn’t likely to resolve in the very near-term. “The new normal for mortgage rates could be around 7% for a while,” he said, before doing some back-of-the-envelope math in an effort to communicate what this means for would-be buyers.
“On a $300,000 loan, that translates to a typical monthly mortgage payment of nearly $2,000, compared to $1,265 just one year ago,” he said. According to the NAR, the median existing home price last month was $384,800.
A quick glance at Redfin’s always lively news section found Deputy Chief Economist Taylor Marr editorializing around what, on their data, was an even larger drop in pending home sales for September.
“Until this month, the pullback in the housing market could be described as something of a return to pre-pandemic conditions,” Marr said. “But now both mortgage purchase applications and pending sales are below 2018 levels. A four-year setback is a serious correction.”
Per Redfin, serious correction in activity, not in prices.
There’s going to be a serious correction in prices. It’s unavoidable. I just got off the phone with a mortgage banker two minutes ago. She called me after seeing the headline I used for this article. She said this: “Prices are going to keep coming down. Nobody here has any loans in their pipeline.”
I sympathize (I really do) with not wanting to face the prospect of a nationwide decline that’s going to leave everybody who enjoyed the pandemic bonanza considerably less house rich. But that’s what’s coming.
“But that’s what’s coming.”
…and is needed (unless of course you’re sitting on a big paper gain and are looking to sell).
Buyers are still there. We had an open house this weekend and over 100 people were here
This is like the “I went out to eat last night and there were plenty of people in the restaurant” anecdotes.
Or “It was 30 degrees here today, so global warming isn’t real.”
This market is poised for a very rough ride.
An almost infallible indicator of a material impending correction in any market is implicit goal-post moving on the part of people who would suffer from a correction.
I’m not saying anyone here (i.e., any of my readers) are doing that, I’m just saying that a lot of these recent prints — whether it’s the consecutive MoM declines on the Case-Shiller, or the 30% YoY drop in pending home sales, or even the very fact of a 7-handle 30-year fixed just 19 months on from a 2-handle — are now being rationalized as inevitable when, just six months ago, the same people now taking them in stride would’ve viewed them with a lot of skepticism if they were presented ahead of time as predictions.
Here’s a real-world example: Another industry acquaintance (i.e., someone different from the person mentioned in my comment above) in April said, “That’s certainly the card they’re playing,” when I warned her that the Fed was on the verge of torpedoing the bubble they (the Fed) helped inflate. Her cadence was heavy on skepticism. I haven’t heard from her since, but I’m sure she’s probably pretending that she had accepted this as inevitable months ago when, if she’s honest, she had no idea what was coming.
It will take time to correct as inventory needs to build. It’s also possible the correction will be mild in nominal terms, but large in real terms and it may take quite some time to enter the next up cycle. We shall see.
Maybe in areas that got out over their skis but broad based, I doubt it. Credit scores for mortgage originations ath, housing inventory all time lows, buyers locked in homes bc of low rates mean even tighter supply, buyers on sidelines with Millenials waiting for years to buy homes, down payments subsidized at least in part from wealth transfer from boomers, new housing starts missing millions of homes from 2010s, etc. I have all the charts but that doesnt work here 🙂
I don’t doubt that you have some charts. I do doubt you have any charts that I don’t have, though. As you’ve doubtlessly noticed over the years, I’m in the magic chart machine club.
This will occur very, very slowly because unless homeowners have to sell, they just won’t. They will not want to give up their low mortgage rate and psychologically, it is difficult to sell your house at 80-90% of $X, where $X was peak housing price that occurred in the last 12 months.
The mortgage brokers made a ton of money the past few years, hope they set aside some for the upcoming dry spell.
“This will occur very, very slowly because unless homeowners have to sell, they just won’t.” Exactly!!!
Here’s what’s going to happen (and I’ll surely be able to quote myself on this at some point next year): Eventually, prices will correct more (and probably a lot more) than the vast majority of people who’ve weighed in publicly were ever willing to concede ahead of time.
By that time, though, the sum total of incremental consensus shifts (i.e., everyone moving their goal posts gradually in an ongoing mark-my-implicit-prediction-to-market exercise) will allow most people to claim they weren’t wrong.
In that regard, at least, people learned from 2008. You just go with the flow, and make small concessions along the way, so that you’re always pretty much in step with reality, and thereby never wrong.
H- I hope you are correct because I have my eye on one more vacation rental property, in CA- no less!
Plus, I am never afraid to admit it when I am wrong- I believe that is part of how one “grows” as a human being. 🙂
I lived through the 2008 housing crisis while living in a world class ski resort in CO, patiently waiting for a crash in housing prices- that never occurred. The number of listings, however, ground to a halt.
The dynamics in the housing market will likely start to mirror the issues we’ve had in California for decades. With Prop 13, people don’t sell houses because their property taxes barely go up even as valuations go through the roof. There are also major hurdles (NIMBYism and housing regulations) to building new supply.
We’re seeing the same dynamics with interest rates and the housing gains over the past two years. It’s creating major hurdles for new construction and for people to sell, and it’s going to continue putting upward pressure on prices, even though buyers continue to see their buying power decrease. We’ll clearly see price declines in the near term due to the magnitude of the increase in financing costs, but I’d expect the housing market for the rest of the country to look more and more like California’s housing market and that’s not a good thing.
Death and divorce will force some selling and the comparables will change because of that. Even if you buy with the high mortgage rates it may be a danger to think that you will refinance easily.
There’s a potential source of housing supply that I haven’t seen discussed since the early days of the pandemic, but if it starts to emerge, it could significantly accelerate price declines: AirBnB.
If the economy goes into a more pronounced recession, a lot of properties bought as investments to be used as AirBnB rentals could find themselves in the situation where they’re no longer generating enough income to cover loan payments, but they still represent an unrealized capital gain thanks to the last couple years’ meteoric real estate price growth. In that scenario, a lot of people would decide to sell now while they can still book a gain rather than continuing to hemorrhage cash on an unprofitable property.
WMD – great point. Just a few days ago there were stories about an oversupply of ABNB properties on offer. That has sharply pushed down occupancy levels for “hosts”.
Perhaps that will help trigger the kind of selling you alluded to.
H-Man, it may be that apartment conversions to condos are right around the corner.
if there was a ‘quality indicator’ like for corp bonds – AAA, … C-, what quality range makes up houses being offered? My personal view (PDX market primarily) is that 1/2 of offered inventory is CRAP, e.g., location, quality, abused by renters (airBNB, etc) … means, averages, medians without quality vector are nearly laughable, but what else ya got?
This might be the only site where the comment section is sometimes as Colleen in quality to the actual article
Don’t forget coming car loan defaults. Financial impact may be worse than housing.
An amazing 13% of June buyers are paying $1,000+ per month for cars that were overpriced. The average loan was $40,000+. Repossessions are starting to rise. Banks and others that were lending 120% of a car’s book value will be lucky to recover 80% of that value at auction. That’s a big hit.
And few may be lending for future sales till prices drop.
This aspect of American life mystifies me. I recently read (maybe it was apocryphal?) about a husband/wife that had borrowed 140K to buy two vehicles. Seriously? Aren’t cars among the most, if not the most, depreciating asset going?
Selling my home. Closing is next month. Bucolic and inconvenient, it was time to leave Trump country. Property sold for roughly 50% more than what I paid. I mentioned this before — my new rent is 3x my mortgage payments. My fingers are crossed for a crash in ~12-24 months.
I should also note the buyers sold their home in less than 2 days after putting it on the market, so there’s still some regionality going on.
Housing will revert to its long term trends as all assets will at some point.
So, what caused the 10% drop in pending sales, did deals fall through, did buyers back out? We are trying to buy in 55+ communities where prices don’t seem to drop and competition is strong. Is that different? Is the east coast (PA Philly) market different? doesn’t seem to be slower here. Lots of comments, hoefully someone will opine.