Current State of the Housing Market
Current State of the Housing Market
This is a market overview for mid-October
Over the last month …
New listings have declined further year-over-year.
Mortgage rates have increased further pushing monthly payments up sharply.
House prices have started to decline month-over-month (MoM) as measured by the repeat sales indexes.
New Listing Have Declined Significantly
Here is a graph of new listing from Realtor.com’s September Housing Trends Report showing new listings were down about 10% year-over-year in September.
And just last week, Realtor.com reported new listings were down 17% year-over-year:
• New listings–a measure of sellers putting homes up for sale–were again down, dropping 17% from one year ago. This week marks the thirteenth straight week of year over year declines in the number of new listings coming up for sale.
Impact on Inventory
The following graph uses the Altos inventory data through October 7th and shows the of the same week compared to 2019, 2020 and 2021. The blue line (compared to 2021) shows inventory is up YoY. Inventory was increasing sharply earlier this year, but then inventory growth stalled as new listings declined. Recently inventory has been increasing again - even with new listings down further.
The red line compares to 2020, and inventory is now up compared to the same week in 2020. The dashed purple line is compared to 2019, and inventory is still down 41% compared tin the same week in 2019. This will be a key comparison for inventory.
For new homes, there are 5.4 months of homes under construction - well above the normal level. This elevated level of homes under construction is due to supply chain constraints. However, there are only about 60% of the normal level of completed homes for sale. 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.
And for housing starts there are a record 1.702 million units under construction.
30-Year Mortgage Rates Have Increased to Over 7%
The following graph from MortgageNewsDaily.com shows mortgage rates over the last 12 months.
Currently mortgage rates are at a 20-year high. The payment on a $500,000 house with 20% last year, with 3.2% 30-year mortgage rates, would be around $1,730 for principal and interest. The payment for the same house, with prices up 15% and mortgage rates at 7.1%, would be $3,091 - an increase of 79%!
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 strong, but the Case-Shiller National Index has started to show a sharp deceleration to 15.8% YoY in July. The recent slowdown is taking some time to show up in the price indexes, see: When will House Price Growth Slow?
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 “July” prices are for sales that closed in May, June and July. A few of those contracts were probably signed in March!
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 -0.24%. This was the first MoM decrease since February 2012, and since this includes closings in May and June, this suggests prices fell sharply in July.
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 slowed to 7.7% in August (still solid increase in YoY prices).
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 generally seeing declines in both new and existing home sales due to higher mortgage rates. The NAR reported sales in August were at “a seasonally adjusted annual rate of 4.80 million. Year-over-year, sales dropped 19.9% (from 5.99 million in August 2021).
The early local market reports suggest a similar year-over-year decline in closed sales in September.
However, the Census Bureau reported “Sales of new single‐family houses in August 2022 were at a seasonally adjusted annual rate of 685,000”, down only 0.1% from August 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: Net vs Gross Sales.
From example, a few weeks ago, Tracey Ryniec, Equity Strategist at @ZacksResearch noted last week that KB Home saw a huge increase in cancellations. This suggests the Census Bureau is significantly overstating new home sales.
Conclusions
We are seeing a significant year-over-year decline in the housing market with fewer sales. We are just starting to see the impact on house prices. And even with a sharp decline in new listings, inventory has been increasing again.
A week from Thursday, the NAR will release existing home sales for September. This report will likely show another sharp year-over-year decline in sales for September. Housing starts will probably show further declines (and still a near 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.