US Housing Market Enters 2023 As Bubble-Puzzle

Home sales in the US either tumbled the most on record last month or ran at a pace that matched the highest estimate from 60 economists.

I’m referring, of course, to the juxtaposition between sales of existing homes and the rate at which Americans agreed to purchase new, half-million dollar, tract-built boxes. The conflicting signals were indicative of the bubble-puzzle that is the US housing market.

I assume this is obvious to most readers, but just in case: You can’t rely on the government’s new home sales data to get a good read on the market. In addition to being volatile, it’s difficult (read: impossible) to ascertain the impact of incentives like buy-downs, paying points for buyers and, when all else fails, price cuts.

I’d also note that buyers willing to condemn themselves to 30 years of pseudo-imprisonment in a community of mostly identical cubicles are probably squeezing tract builders for all they’re worth right now. Unless the dynamics have changed over the years (which I doubt), 5% earnest money gets you a (usually pitiful) plot and the builder typically rolls up the deal into a traditional loan package. Although affordability determinations are based on the prevailing rate, buyers may not have to lock until the house is finished, which could be advantageous in the current environment. I’d imagine some of those builders (and particularly the on-site salespeople whose livelihoods depend on filling out those neighborhoods) are very open to hearing buyers’ ideas when it comes to what concessions they’d need to sign a contract.

Between all of that, the recent pullback in mortgage rates, and the fact that new homes are a minuscule percentage of the market, it’s hard to take seriously the notion that November’s robust read on new home sales was representative. The 640,000 annual rate nearly topped every estimate, and notwithstanding downward revisions to the prior three months, a cursory glance at the chart suggested a trough.

For the full year, new home sales were on pace for 654,000, down from 2021’s 771,000. Backlogs were the highest since the start of the year in November, even as completed homes for sale rose an eighth month.

The data, released into a pre-holiday void, came on the heels of a 12th straight decline in builder sentiment and a 10th consecutive drop in existing home sales, which plunged a harrowing 35% on a 12-month basis last month, according to NAR data.

Redfin’s numbers told a similar story. November’s 35.1% drop in home sales was the largest in the history of the company’s data, which only goes back a decade. Notably, the bidding war rate has plummeted from the pandemic highs.

The monthly share of Redfin home offers that faced competition is now roughly back to levels observed prior the pandemic property boom.

Plainly, that should weigh on prices for existing homes, and if concessions and incentives prove insufficient to lure buyers for new houses, prices should eventually recede there too.

For now, though, the median new home price remains near half a million. Last month, it was $471,200, down from October’s record high, but not by much.

The annual rate of price appreciation was back in the single digits, albeit just barely.

“The worst of inflation is likely in the rearview mirror,” Redfin’s research lead Chen Zhao said this week. “We do anticipate that mortgage rates will decline slightly further in 2023 as the Fed’s actions continue to bring inflation down, which should ultimately bring more homebuyers back to the market.”

Hope springs eternal, I suppose. Although my own search for new scenery isn’t exactly emblematic of the typical US homebuyer’s experience, I can tell you, for what it’s worth, that we’re approaching “or best offer” conditions for at least some unique homes. The last several properties I’ve inquired about didn’t really have an asking price in any concrete sense of the term. That’s not to say the sellers were desperate by any stretch, or even “motivated,” to employ the preferred vernacular. Rather I’d describe them as weary, and in some cases on the brink of “You know what? Forget it. I’ll just keep it” territory, which is amusing when you actually hear it communicated to you second-hand from a buyer’s agent fresh off the phone with their counterpart on the seller’s side.

Redfin data based on an analysis of county records for October showed that almost a third of US homes purchased that month were paid for in all cash. That was the highest since 2014. The above-mentioned Zhao made an interesting observation. “Today’s affluent homebuyers are motivated to pay in cash because the surge in mortgage rates makes them want to avoid loans [but] during the pandemic housing boom, buyers were incentivized to pay in cash because of low rates, which drove up competition and made all-cash offers an effective bargaining chip for those who could afford them.”

As it turns out, there’s never a bad time to have a million dollars in cash.