Results Pending, Hope Floats

I doubt anyone needed additional evidence to support the contention that the US housing market is experiencing a bout of turbulence, to put it politely.

Although government figures released late last week suggested new home sales were more robust than expected in November, the rest of the numbers are uniformly poor, including existing home sales and builder sentiment, both of which are mired in a lengthy stretch of monthly declines. Falling permits suggest demand is extremely tepid amid still elevated mortgage rates and near record-high prices.

But, just in case you weren’t convinced that the downturn is real, Wednesday delivered a very large decline in pending home sales, which fell 4% MoM, quadruple the expected decline.

Pending home sales index lowest in decades excluding pandemic drop

It was the sixth straight decline and, notably, took the index to the second-lowest level on record in data going back decades. The actual print came in below even the most pessimistic guess from economists.

The NAR’s Lawrence Yun blamed the cost of money which, as you might’ve noticed, isn’t free anymore. “Interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home,” Yun said Wednesday.

Time and again, I’ve argued that from a dispassionate perspective (i.e., concerned only with the implications for the broadest of all economic aggregates), the best argument for why this situation is unsustainable is that the implications for residential fixed investment are such that allowing the market to remain frozen simply isn’t an option.

An untenable state of affairs

As Yun noted Wednesday, “the residential investment component of GDP has fallen for six straight quarters.” That’s virtually guaranteed to result in recession.

Mortgage rates have, of course, come down recently, and while they’re not especially punitive in the historical context, they certainly are high versus recent history, which is the frame of reference for Millennials. That’s a psychological overhang, and when taken in conjunction will very high prices, it’ll be difficult for some would-be buyers to shake.

On an unadjusted, 12-month basis, pending home sales dropped almost 39% last month.

Unprecedented. Or so it appears

I don’t love working with the unadjusted series, but as far as I can tell, that counted as the biggest drop on record.

Like large bubbles, hope floats. “There are approximately two months of lag time between mortgage rates and home sales,” Yun went on to remark, in Wednesday’s press release. “With mortgage rates falling throughout December, home-buying activity should inevitably rebound in the coming months.”

I’d gently note that only two things are “inevitable” in life. A rebound in home-buying activity after a steep decline isn’t one of them.


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