Current State of the Housing Market
This is a market overview for mid-July.
First, two national mortgage lenders have recently closed: First Guaranty Mortgage Corp. and non-QM lender Sprout Mortgage. With refinance activity mostly shut down, there will likely be more mortgage lenders closing soon. However, this will not be like the lender implosion following the housing bubble, since the quality of recent loans - and the structure of the industry - is very different from the bubble years.
Lenders that have focused on refinancings will be hit the hardest. Here is a graph of the Mortgage Bankers Association’s (MBA) refinance index showing the index is near the lowest level since the year 2000. The purchase market is holding up better.
But the big story continues to be the recent sharp increase in inventory.
Inventory is Housing’s Crystal Ball
The NAR reported inventory was down 4.1% year-over-year in May. Other sources, such as Altos Research and Realtor.com, indicate active inventory was up year-over-year (YoY) in May and is now up sharply in early July.
The early local market reports for June show inventory up over 47% YoY for these markets! These same markets were up less than 20% YoY in May.
It is important to realize inventory is both increasing rapidly and still very low. Here is a graph from Realtor.com’s June Housing Trends Report. This shows their estimate of active inventory over the last six years. Currently inventory is rising quickly, but still far below normal. Note: the Red dot is my estimate for July.
Since inventory was declining rapidly for most of 2020, and it is very likely that inventory will be up in late August compared to 2020.
This week Altos Research released inventory data as of July 11th showing that Inventory is increasing rapidly. Inventory is usually flat - or declines slightly - over the 4th of July weekend. This year inventory was up 3.2% from the previous week.
Here is a graph using the Altos inventory data of the trend comparing to 2020 and 2019. The dotted red line is the recent trend compared to 2020 - and at the current pace, inventory will be up compared to 2020 in late August. The dashed grey line is comparing to 2019, and based on the current trend, it is possible inventory will be back to 2019 levels by the beginning of 2023.
For new homes, there are 5.0 months of homes under construction - well above the normal level (total inventory is at 7.7 months, but that includes homes not started). This elevated level of homes under construction is due to supply chain constraints. This is close to the record set in 1980. However, there are still very few completed homes for sale.
And for housing starts there are a record 1.665 million units under construction. This eclipses the previous record of 1.628 million units that were under construction (mostly apartments in 1973 for the baby boom generation).
House Prices
Reported house price growth is still very strong, and the Case-Shiller National Index will likely still show close to 20% year-over-year growth for May (to be released on July 26th). The recent slowdown will take some time to show up in the price indexes, see: When will House Price Growth Slow?
The Case-Shiller index is a three-month average of closing prices, so “May” prices are for sales that closed in March, April and May. A few of those contracts were probably signed in January!
We have to be patient waiting to see the impact on house prices of the slowdown in sales due to the significant data lags. Meanwhile, Altos Research CEO Mike Simonsen noted this week that “prices reductions” are close to normal. And he expects 40% of properties will see price reductions by September.
Note the dark red line on the graph below. The percent of recent price reductions is close to normal for this time of year and increasing quicky. This is an early indicator of the coming slowdown in house price growth.
Here is my outlook for house prices: What will Happen with House Prices?
Sales
We are starting to see declines in both new and existing home sales due to higher mortgage rates. The NAR reported sales in May were at “a seasonally adjusted annual rate of 5.41 million. Year-over-year, sales dropped 8.6% (from 5.92 million in May 2021).
Sales that closed in May were likely signed in March and April, and with higher mortgage rates in May and June, I expect sales to decline further in June. The local market reports released so far suggest a significant decline in closed sales in June.
And the Census Bureau reported “Sales of new single‐family houses in May 2022 were at a seasonally adjusted annual rate of 696,000”, down 5.9% from May 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, gross sales is too high. See: New Home Sales and Cancellations
Earlier this week, Rick Palacios Jr., Director of Research at John Burns Real Estate Consulting tweeted that new home cancellations have increased sharply in June.
Home builder cancellation rates jumped in June. Already above end of 2018 levels when rates touched 5% and approaching 2020 COVID panic peak.
Conclusions
We are seeing a clear slowing in the housing market, with more price reductions, more inventory, and fewer sales. It will take some time to see the impact on house price growth, but that is coming too.
Next week, existing home sales will likely show a sharp year-over-year decline in sales for June, and housing starts will probably show further declines (and still a record number of homes under construction).
It is important to remember that housing is a key transmission mechanism for Federal Open Market Committee (FOMC) policy. As long as inflation remains elevated, the Fed will keep raising rates - and that will impact the housing market (although mortgage rates have already jumped in anticipation of the FOMC actions).
I’ll have much more on all of these topics.