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

A Sharp Decline in Sales, House Prices and Rents Falling

Over the last month …

1. New listings have declined further year-over-year (YoY).

2. Mortgage rates have declined recently but are still up sharply YoY.

3. House prices are declining month-over-month (MoM) as measured by the Case-Shiller repeat sales index.

4. Rents are falling.

New Listings Have Declined Significantly

Here is a graph of new listing from Realtor.com’s November Housing Trends Report showing new listings were down about 17% year-over-year in November.

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

For these areas, new listings were down 18.9% 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 17.6% YoY.

Impact on Inventory

The following graph uses the Altos inventory data through December 9th and shows the of the same week compared to 2019, 2020 and 2021. The blue line (compared to 2021) shows inventory is up 58.0% YoY. Inventory was increasing sharply earlier this year, but then inventory growth stalled as new listings declined. Recently inventory has been increasing again YoY, even with new listings down further.

The red line compares to 2020, and inventory is now up 14.3% compared to the same week in 2020. The dashed purple line is compared to 2019, and inventory is still down 34.8% compared to the same week in 2019. This will be a key comparison for inventory in 2023.

For new homes, there are 5.7 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 1.722 million units under construction.

30-Year Mortgage Rates Declined from October Highs

The following graph from MortgageNewsDaily.com shows mortgage rates over the last 12 months. 30-year mortgage rates were at 6.28% on December 13th, 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. The payment on a $500,000 house last year, with a 20% down payment and 3.1% 30-year mortgage rates, would be around $1,710 for principal and interest. The monthly payment for the same house, with house prices up 11% YoY and mortgage rates at 6.28%, would be $2,742 - an increase of 61%! 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 year-over-year (YoY) house price growth is still solid, but the Case-Shiller National Index slowed to 10.6% YoY in September.

The above graph shows the YoY change for the three Case-Shiller indexes. The Case-Shiller index is a three-month average of closing prices, so “September” prices are for sales that closed in July, August and September. A few of those contracts were probably signed in May! This was before mortgage rates jumped above 6% in September, and above 7% in October. The impact of those increases will not show in the Case-Shiller index for a few more months.

The next graph shows the month-over-month (MoM) decrease in the seasonally adjusted Case-Shiller index. The MoM decrease in Case-Shiller was at -0.76% seasonally adjusted. This was the third consecutive MoM decrease, and slightly less than the decrease last month. Since this includes closings in July and August, this suggests prices fell sharply for September closings.

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 6.6%. In general, the NAR median price leads the Case-Shiller index by 2 to 3 months, so I expect the Case-Shiller index to show significantly slower YoY growth over the next several months.

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 October were at a “seasonally adjusted annual rate of 4.43 million in October. Year-over-year, sales dropped by 28.4% (down from 6.19 million in October 2021).”

The early local market reports suggest an even larger year-over-year decline in closed sales in November.

And the Census Bureau reported “Sales of new single‐family houses in October 2022 were at a seasonally adjusted annual rate of 632,000”, down 5.8% from October 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.

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 again.

Next Wednesday, the NAR will release existing home sales for November. This report will likely show another sharp year-over-year decline in sales for 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.