Current State of the Housing Market; Overview for mid-January

A Sharp Decline in Sales, House Prices and Rents Falling

New Listings Have Declined Significantly

Here is a graph of new listing from Realtor.com’s December Housing Trends Report showing new listings were down about 21% year-over-year in December.

And the local markets I track that have reported so far, show new listings were down more in December than in November.

For these areas, new listings were down 33.4% YoY. Potential sellers that are locked into their current homes with low mortgage rates has pushed down new listings.

Last month, new listings in these markets were down 26.6% YoY

Impact on Inventory

The following graph shows the seasonal pattern for active single-family inventory since 2015. The red Dot is for the first week of 2023.  The black line is for 2019.

Inventory was up 61.4% compared to the same week in 2022, and down 42.3% compared to the first week in 2019.  Recently inventory has been increasing again YoY, even with new listings down further. A key will when inventory starts increasing in 2023 (the bottom is usually in February of each year).

For new homes, there are 5.5 months of homes under construction (blue line below) - well above the normal level. This elevated level of homes under construction is due to supply chain constraints. There are 1.2 months of completed homes for sale (red) - getting close to the normal level.

It is likely we will see a sharp increase in completed inventory over the next several months - and that will put pressure on new home prices. Note: Due to the increase in cancellations, the Census Bureau is probably overstating sales, and understating inventory - especially completed inventory.

And for housing starts there are a record 1.71 million units under construction.

30-Year Mortgage Rates Declined from October Highs

The following graph from MortgageNewsDaily.com shows mortgage rates over the last 3 years. 30-year mortgage rates were at 6.15% on January 11th, down from over 7% for most of October.

Mortgage rates were over 7% for most of October but fell sharply following the CPI reports for October and November (and another positive CPI report this morning for December). The payment on a $500,000 house last year, with a 20% down payment and 3.5% 30-year mortgage rates, would be around $1,796 for principal and interest. The monthly payment for the same house, with house prices up 9% YoY and mortgage rates at 6.15%, would be $2,656 - an increase of 48%! Even though mortgage rates have declined recently, monthly payments are still up sharply year-over-year.

There are always some people that need to sell; death, divorce, moving for employment are a few reasons. However, homeowners with a low mortgage rate will be reluctant to sell, and then buy a new home, when their monthly payment will be much higher for the new home. The sharp increase in mortgage rates is probably the key reason new listings have declined sharply year-over-year.

This is a very different from the housing bust, when many homeowners were forced to sell as their teaser rates expired and they could not afford the fully amortized mortgage payment. The current situation is similar to the 1980 period, when rates increased quickly.

House Prices

Reported YoY house price growth is still solid, but the Case-Shiller National Index slowed to 9.2% YoY in October.

The above graph shows the YoY change for the three Case-Shiller indexes. The October Case-Shiller report is mostly for contracts signed in the June through September period when 30-year mortgage rates were mostly in low-to-mid 5% range except in September when rates moved up to the low 6% range. The November report will mostly be for contracts signed in the July through October period - and will be impacted partially by the surge in rates in October.

The impact from higher rates in October and November will not show up significantly in the Case-Shiller index for a couple more months.

The MoM decrease in the Case-Shiller National Index was at -0.26% seasonally adjusted. This was the fourth consecutive MoM decrease, but smaller than the decrease over the previous three months.

And here is a graph comparing the YoY change in the NAR median prices vs the Case-Shiller National Index (the median is distorted by the mix of homes sold, and also lagged since this is for closing prices).

The YoY change in the median price peaked at 25.2% in May 2021 and has now slowed to 3.5%. In general, the NAR median price leads the Case-Shiller index by 2 to 3 months. Note that the median price usually starts falling seasonally in July, so the 2.1% decline in November in the median price was partially seasonal, however the 10.4% decline over the last five months has been much larger than the usual seasonal decline.

It is likely the median price will be down year-over-year in a few months - and Case-Shiller will follow. I’m now forecasting a 10%+ decline in nominal house prices, see: House Prices: 7 Years in Purgatory.

Sales

We are mostly seeing declines in both new and existing home sales due to higher mortgage rates. The NAR reported sales in November were at a “seasonally adjusted annual rate of 4.09 million in November. Year-over-year, sales dwindled by 35.4% (down from 6.33 million in November 2021).”

The early local market reports suggest a similar year-over-year decline in closed sales in December. If national sales decline by the same percent as last month, the NAR will report sales for December under 4.0 million SAAR - below the 4.01 million in May 2020 (pandemic low) and the lowest sales rate since 2010.

And the Census Bureau reported “Sales of new single‐family houses in November 2022 were at a seasonally adjusted annual rate of 640,000”, down 15.3% from November 2021.

It is important to note that the Census Bureau reports gross sales, whereas the homebuilders report net sales (gross sales minus cancellations). Usually this isn’t a big difference, but during periods of rising cancellations, reported sales are too high, and inventory is too low.

Rents Falling Faster than "Seasonality Alone"

Rents are now declining, and as the pace of household formation slows, and more supply comes on the market we will likely see further rent declines. This will be key for the Fed, and perhaps the Fed should look at core inflation ex-shelter.

This graph shows the year-over-year change in Core CPI ex-Shelter (blue), and the one month change annualized (red). The year-over-year change was at 4.4% in December, down from 5.2% in November. And the annualized one-month change was negative in October, November and December!

Conclusions

We are seeing a significant year-over-year decline in the housing market with fewer sales and more cancellations. We are just starting to see the impact on house prices. And even with a sharp decline in new listings, inventory is increasing YoY.

On Friday, January 20th, the NAR will release existing home sales for December. This report will likely show another sharp year-over-year decline in sales for December, similar to the YoY decline in November. Housing starts will probably show further declines (and still a near record number of homes under construction).

I’ll have much more on all of these topics.