Americans Keep Mortgaging Their Lives Away

Incorrigible Americans, spurred on by some combination of rate buy-downs and FOMO, bought more brand new houses in October than almost anyone expected, data out Wednesday suggested.

I’m just joking. Not about Americans. And not about the houses either. Americans are incorrigible. And they did buy some houses. But it’s impossible to say why. And new home sales account for just a fraction of the market. Also, the series isn’t the most reliable, so attempting to draw any kind of definitive conclusions is a fool’s errand.

Nevertheless, the beat was remarkable. The 632,000 annual rate nearly matched the highest estimate from five-dozen economists. Consensus expected a 5.5% decline in sales. Instead, they rose almost 8% (figure below).

Figures for the prior two months were revised lower.

Gains were driven by the Northeast and South. Homebuilders rallied after the data hit. Months’ supply fell from September, while total houses for sale rose.

There was scant evidence of relief on the price front. In fact, the median new home price hit an all-time record high last month at $493,000. The annual pace of price growth re-accelerated to 15.4% (figure below).

The average price was $544,000, the highest since July, and among the highest ever.

My position on this is no secret. It’s not sustainable. I’m adamant about that. I realize I’ve said as much on too many occasions to count (some readers are doubtlessly tired of it), but consider this: The median new home price in America now sits 50% above pre-pandemic levels.

Have a look at the figure (below). Allow me to immediately dispense with the obvious: It’s a “chart crime” on multiple fronts. If I didn’t make it, I wouldn’t take it seriously. That’s as forthright and honest as I can possibly be. However, it just is what it is, so to speak. It’s the rolling three-year price appreciation for new homes in America overlaid by the rolling one-year change in the cost of financing those homes. The former is running at a 50% pace, and the latter is up 380bps from 12 months ago off a 306bps base. Read that again. The only thing rising faster than the price of this highly leveraged asset over three years is the cost of financing it.

That conjuncture, contrived as it is by my efforts to goal-seek a compelling chart, is unprecedented.

Little wonder Americans have never been as pessimistic as they are currently about the housing market. According to the University of Michigan sentiment survey, 2022 is the single worst time to buy a house in history — where “history” here just means the history of that series, which dates to 1978.

Mortgage rates have fallen nearly a half percentage point over the past two weeks, according to the latest MBA data, released Wednesday. “The decrease in mortgage rates should improve the purchasing power of prospective homebuyers, who have been largely sidelined as mortgage rates have more than doubled in the past year,” Joel Kan, MBA’s Vice President and Deputy Chief Economist, said. “As a result of the drop in mortgage rates, both purchase and refinance applications picked up slightly last week [but] refinance activity is still more than 80% below last year’s pace.”

Obviously, rates have a dramatic impact on affordability, so a 50bps drop is meaningful. But with the median new home price at nearly half a million dollars, it’s difficult to imagine a scenario where “median” American families continue to mortgage their financial future (pun fully intended) on what, forgive me, seems like a highly irresponsible bet. Sure you can “marry the home, date the rate,” as the saying goes, but that’s a gamble on rates falling. I happen to think it’s a good gamble given the high odds of recession and the likelihood of lower long-end US Treasury yields. But it’s a gamble nevertheless.

One of three things has to be true here (they’re actually not mutually exclusive): Buyers are paying cash, buyers are taking a huge risk by locking in relatively high financing costs for a highly leveraged asset at record high prices and/or sellers are buying down rates, which effectively embeds ARMs across the US economy. Only one of those three things is riskless from a macro perspective. (Nobody cares much if all-cash buyers lose $50,000 on paper for a while in a downturn.)

On Tuesday, while speaking to a panel in Santiago (which, for the geographically challenged, is the capital of Chile, not an expensive city in California), Esther George conceded that the Fed’s purchases of mortgage-backed securities might’ve helped push up house prices.