Surprise! Existing US home sales fell again in October, data released on Tuesday showed.
The 3.79 million pace marked a 4.1% decline from the prior month and counted as a new “since 2010” low.
If was the fifth straight decline and the 19th in 21 months.
The range of estimates for the annual rate was 3.78 million to 4 million from 58 economists who ventured a guess.
No one needs to hear this story again, but… alas. Resale inventory is scarce. Although mortgage rates receded in November amid a sharp rally at the long-end of the US Treasury curve, most Americans have three-, four- or, at worst, five-handle mortgages. Anybody with any sense refinanced in 2020 or 2021 when rates reached record-lows. Maybe you’ll sell if you own outright and are content to use the proceeds to purchase a cheaper home or a home of comparable value. What you probably won’t do, though, is trade a four-handle mortgage for a seven-handle mortgage, which means lots of homeowners are reluctant to put their property on the market. That’s crimping supply, which in turn keeps prices artificially elevated for existing properties.
That dynamic is so pervasive that The New York Times ran a feature article about it this week. It’s an example of how higher rates can actually put upward pressure on inflation, and it’s impairing the monetary policy transmission channel.
You could argue (and I’m sure this’ll go down like a lead balloon with readers) that fixed-rate 30-year mortgages are a bad idea. After all, if you have to finance something over three decades in order to buy it, and even then you need financing costs to be set at 3% for the life of the loan, guess what? You can’t afford the damn thing. Sorry. Maybe variable rates would make buyers and lenders a little more cautious, particularly with the memory of the 2008 ARM crisis still relatively “fresh.” (Readers outside the US may have some anecdotes to offer in this regard.)
I’m a staunch advocate for affordable housing, but the way we’ve gone about things plainly isn’t working. In a sane world, houses would be priced such that regular people wouldn’t need 30-year loans paired with artificially-suppressed rates to purchase them. If your local Bentley dealership ran a Black Friday special that offered 3% financing for 20 years, you wouldn’t go buy a Flying Spur even if you could technically “afford” it with the special pricing. Why not? Well, because you have no business driving a Flying Spur.
I’ve said this again and again, and no tortured affordability equation is going to change my mind about it: Regular people don’t buy things that cost half a million dollars, even in our “higher nominal everything” world. I don’t care if it’s a house or a Rolls Royce, if it’s half a million dollars and you’re a “median” person, you can’t afford it. Homes are different than Phantoms because median people need homes. So, median homes can’t cost $500,000.
You can’t solve that equation by driving rates lower and lower so that median people can continue to finance properties they couldn’t otherwise afford. All that’s going to do is perpetuate an upward spiral in prices. If you should ever need to raise rates, anyone who didn’t get in on the final leg of the bonanza is going to be locked out completely by the combination of absurd property values and rising financing costs. That might be ok if we were talking about something people don’t need, but we’re talking about shelter.
Fortunately, the median existing home actually doesn’t cost $500,000 in America. It was “only” $391,800 last month, the NAR said Tuesday. Do note: That was up 3.4% from a year ago. October marked the fourth consecutive month of YoY price gains.
Again: There isn’t anything confusing about this. There aren’t enough existing homes to go around and new construction can’t fill the void fast enough.
“Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation,” NAR Chief Economist Lawrence Yun said Tuesday, adding that last month’s median price was an October record.
“While circumstances for buyers remain tight, home sellers have done well,” Yun went on. “In fact, a typical homeowner has accumulated more than $100,000 in housing wealth over the past three years.”
That’s great. The part about homeowners adding six figures to their net worth in just three years, I mean. We absolutely want property prices to rise gradually (note the emphasis) over time, and it makes all the sense in the world that real estate should appreciate — “They ain’t makin’ no more of it,” as the old adage goes.
But this situation is quite obviously unsustainable. That’s not to suggest prices are destined to fall. I used to think that. Not so much anymore. Indeed, it’s now hard to see how prices could fall. If they don’t, and we have indeed transitioned permanently away from the easy money era, then a lot of people are going to be homeless — figuratively in the sense that local market conditions make renting more attractive and record-high home prices make saving enough for a downpayment impossible, or literally.
I currently live in the biggest house I’ve ever had. I was new when I bought it 14 years ago and was about a median priced home. I have no mortgage and I have made improvements to upgrade useful things. Astonishingly, my taxes are going to drop about 7% for the coming year, about the same as last year. I wish I understood this market better and I’ve written a book about this stuff.
The other unfortunate aspect about this is that we’ve allowed local governments to block density in desirable locations. That plays a huge role in affordability as well. The arguments about maintaining the “character” of a neighborhood really just means increase my property values at the expense of affordable housing for others. This is the ultimate example of pulling the proverbial ladder up behind you.
They may not make more land, but they can certainly fit more houses on the land that already exists.
Increasing permitted density in high-priced urban single-family areas is something I’ve looked at a lot. What typically happens is that raising the permitted density drives land value much higher. The lot size remains single-family house sized, so if using the least expensive construction type (a couple floors of wood frame over a masonry ground floor) the potential multi-family building is fairly small (height, footprint, units). The high land cost and all the other hard and soft project costs and overhead/profit have to be amortized over rather few units.
I’ve looked at the pro formas, and absent large public subsidy these projects never produce affordable housing. In the hands of for-profit developers, they can produce small high-priced housing, in the form of expensive apartments and row houses. They tend not to work as condos – a 4-6 unit condo building is a nightmare. When affordable housing developers do projects (with large public subsidies, regulated rents, ostensibly non-profit) they look for larger lots; they usually don’t mess around with lots sized for single houses.
TL:DR look at Vancouver BC, has tried every density trick in the book, and housing prices have kept going up – landowners have gotten rich, though. I’ll recommend a book “Sick City” by Patrick Condon, on this topic.
John, I’m a fan of your always thoughtful contributions to this site. Thank you for your efforts.
Yeah, John’s the man. Except when he doesn’t agree with me. 🙂
I don’t know that I’d consider Vancouver a representative example, especially if we are talking about the US housing market. It does appear that the new housing production has picked up there though. Here is a report they’ve produced on housing dynamics (https://vancouver.ca/files/cov/pds-housing-policy-housing-needs-report.pdf). I admittedly don’t have time to dig into all the details, but I have a hard time imagining that the new supply is a contributor to driving up overall housing costs.
Also, it’s not just about turning single-family lots in urban areas into multi-family units (although I did see a lot of single-family homes turned into duets when I lived near downtown Denver). There is no shortage of building opportunities in the suburbs as well, but there is almost always opposition to converting shopping or office lots into high density housing, especially out here in California. Any new construction that does manage to get approval still either has to go through a ton of red tape or ends up in the exurbs which creates its own set of problems.
A perfect example in my own suburb is a golf course that runs through the middle of the city that developers are salivating over, but residents will not let be developed. Yes, any new units would likely be high priced condos, but you sure could fit a lot of nice houses on that land and you’d help free up supply at the lower end of the market.
Got it. I wasn’t thinking of residential development in office/retail areas. That doesn’t draw much (any?) opposition in my city. The lots are large enough for the project to have scale, and the existing buildings are increasingly challenged occupancy-wise.
In fact, I don’t think we have much commercial zoning that would exclude residential (other than actual “industrial” zones).
Shopping malls and their acres of parking lots are candidates for residential redevelopment. The class C and B malls are usually struggling and their owners looking for a way out. Always plenty of transit nearby.
Development goes in cycles. There was a big surge in multi-family permits and starts during the pandemic, in response to free money, WFH, and double-digit rent increases. Now that new supply is hitting the market and in many markets developers have hit the brakes on new projects, in response to not-free money and flattish rent growth. In the Sunbelt especially.
None of the above has much to do with affordable housing. The production of affordable housing basically responds to subsidies, is what I’ve seen. The more (less) public money offered, the more (less) affordable housing gets built. In my city there is no such thing as new unsubsidized affordable housing. There is old housing stock that is affordable unsubsidized, but it is being redeveloped away.