In Housing: ‘Difficult Months’

News sections on real estate websites read like obituaries these days. Not so long ago, they were collections of party invites.

Buoyant home prices in the US belie a market frozen in time. Notwithstanding recent declines in mortgage rates (which have dropped alongside a bullish tone in Treasurys), the soaring cost of financing is keeping sellers from selling and buyers from buying. It’s a stalemate that leaves everyone sidelined.

Would-be sellers aren’t excited about offering concessions and are even less enthusiastic about trading a rock-bottom mortgage for a much higher rate. Would-be buyers are completely bereft — even if they can muster 20% down, they can’t afford the monthly payments with rates more than double recent lows.

Small wonder that, according to Redfin (whose shares have collapsed this year), pending home sales fell by a record last month amid deal cancellations and all-time high price cuts. “Pending sales dropped 32.1% YoY last month, the largest decline since at least 2013, when Redfin’s records begin,” Lily Katz wrote, adding that “nearly 60,000 home-purchase agreements fell through, equal to a record 17.9% of homes that went under contract [while] almost one-quarter of homes for sale experienced a price drop, double the rate of a year earlier.”

Two days after Katz summarized Redfin’s figures, the NAR said pending home sales plunged 37% YoY in October, a remarkable decline and a dubious encore from a near 30% drop the prior month (figure below).

On a monthly basis, sales fell 4.6%, a bit better than the 5.3% drop consensus expected, but a fifth straight decline nevertheless. Out West, sales dropped more than 46% from October of 2021.

In a statement (it’s probably more apt to call it an “understatement”), NAR chief economist Lawrence Yun described October as “a difficult month for home buyers.”

Yes, “difficult” it most assuredly was. And still is. Mortgage rates are the highest in more than 20 years, which means that for hypothetical 30-year-old newlyweds hoping to start a family, the last time mortgage rates were this high they were still six years away from being able to legally drive a car.

On Redfin’s data, pending home sales in Allentown, Pennsylvania, dropped almost 55% YoY last month. In Greensboro, North Carolina, they were down 50.4%. As I wrote this very paragraph (and this is completely true), I received a telephone call from a buyer’s agent in Greensboro with whom I spoke several weeks back. “I know you’ve been too busy to look, but I just wanted to let you know that people who were stretching for that $1 million home have been priced back down under $600,000,” he told me. “Some of those $900,000 and up properties are seeing a lot of seller frustration, so there’s an opportunity there,” he added.

A separate Redfin article published last week suggested even investors are “pumping the brakes.” I’d be inclined to say they’re “slamming” the brakes. According to Redfin’s analysis, investor purchases plunged more than 30% nationwide last quarter, comparable to declines witnessed during the subprime bust.

Regular readers will recall that investors moved to corner the market during the boom. At the highs, the share of purchases accounted for by investors exceeded 20%. That figure is still elevated, but at 17.5%, it’s falling very fast (figure above).

That’s good news for buyers in a world full of bad news. “This means that regular buyers who are still in the market are no longer facing fierce competition from hordes of cash-rich investors like they were last year,” Redfin Senior Economist Sheharyar Bokhari noted.

The 26% sequential (i.e., QoQ) decline in investor purchases in Q3 was the largest in the history of Redfin’s data if you don’t count the onset of the pandemic.