US existing home sales actually rose last month, data out Wednesday showed. That (an increase in existing home sales) is something you don’t see every day.
America’s vexing housing conundrum centers on an acute dearth of resale inventory. This is quite simple: Homeowners who don’t own their house free and clear generally have very low mortgage rates. They aren’t excited to trade their rate for one that’s higher. So, they don’t sell. Limited inventory keeps a floor under prices by ensuring the market can’t satisfy demand.
That’s one way (but not the only way) that high rates are working at cross-purposes with the Fed’s efforts to cool inflation. Although rate hikes can curb price growth by dampening demand, high rates can also limit supply which is inflationary under the “right” circumstances.
While elevated mortgage rates have certainly priced many Americans out of the housing market, the resumption of YoY price growth on key national indexes of property values pretty plainly suggests the inflationary inventory shortage is offsetting the disinflationary impact of high rates on demand. The juxtaposition between falling existing home sales and rising prices for existing homes is a testament to that.
People can’t buy what isn’t for sale, and what isn’t for sale are used houses. So, existing home sales fell in 19 of the preceding 21 months through October. In November, they unexpectedly rose. By a whole 0.8%.
The increase pushed the annual pace to 3.82 million, ahead of the 3.78 million consensus expected. The range of estimates, from 63 economists, was 3.65 million to 3.9 million.
According to the NAR, the figures don’t fully reflect the plunge in mortgage rates last month, which suggests an imminent inflection for the better when December’s data is released in January.
“The latest weakness in existing home sales still reflects the buyer bidding process in most of October when mortgage rates were at a two-decade high before the actual closings in November,” NAR Chief Economist Lawrence Yun said Wednesday. “A marked turn can be expected as mortgage rates have plunged in recent weeks.”
In Wednesday’s weekly update from the MBA, mortgage rates fell to “just” 6.83%, the lowest in six months.
The 24bps drop from the prior week marked the fourth time in seven weeks that rates fell by 20bps or more.
MBA chief economist Mike Fratantoni cited the dot plot. “With the positive news about the drop in inflation, and the FOMC projections proclaiming a pivot towards rate cuts, the 30-year fixed mortgage rate reached its lowest level since June,” he said. And yet, refis and purchase applications actually fell over the week.
Coming back to the NAR release, months’ supply of existing homes in November was 3.5, down from 3.6 in October. Not surprisingly, prices rose. Again. The median last month was $387,600. That was up 4% YoY.
November’s increase ran the streak of YoY gains to five months.
Yun didn’t mince words. “Home prices keep marching higher,” he said. “Only a dramatic rise in supply will dampen price appreciation.”
Don’t hold your breath.
Assuming mortgage rates decline, it will be interesting to see which force is stronger: increasing supply of sellers putting their homes on the market, or increasing demand of buyers qualifying for those lower rate mortgages.
Most sellers will have substantial equity and the rate on a new mortgage will only apply to a portion of the price of their next home. For most buyers, the rate on a new mortgage will apply to the entire price ex-down payment of their next home. So I speculate that lower rates may unleash more demand than supply. But this is uninformed speculation – I’m no real estate pro.
That speculation makes sense to me. Relatively equity-heavy sellers should be less sensitive to falling interest rates than relatively debt-heavy buyers. OTOH, the relatively debt-dependent buyers are more likely to simply be priced out even if they benefit more from lower interest rates than the sellers.