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

A Sharp Decline in Sales, House Prices Falling

Over the last month …

1. New listings have declined further year-over-year.

2. Mortgage rates had increased further but declined this week.

3. House prices are declining 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 October Housing Trends Report showing new listings were down about 16% year-over-year in October.

And just last week, Realtor.com reported new listings were down 20% year-over-year:

• New listings–a measure of sellers putting homes up for sale–were again down, dropping 20% from one year ago. This marks the eighteenth week of year over year declines in homeowners listing their home for sale, a sign that homeowners are well aware of the market’s reset.

Impact on Inventory

The following graph uses the Altos inventory data through November 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 with higher mortgage rates, even with new listings down further.

The red line compares to 2020, and inventory is now up 8.5% compared to the same week in 2020. The dashed purple line is compared to 2019, and inventory is still down 36% compared to the same week in 2019. This will be a key comparison for inventory.

For new homes, there are 6.0 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 two-thirds 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. 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 1.710 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 6.62% on November 10th, down from over 7% for most of October.

Mortgage rates were over 7% for most of October but fell sharply following the CPI report for October. The payment on a $500,000 house last year, with a 20% down payment and 3.2% 30-year mortgage rates, would be around $1,730 for principal and interest. The monthly payment for the same house, with house prices up 13% and mortgage rates at 6.6%, would be $2,938 - an increase of 67%! 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 13.0% YoY in August.

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 “August” prices are for sales that closed in June, July and August. A few of those contracts were probably signed in April! 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 several 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 -0.86% seasonally adjusted. This was the second consecutive MoM decrease, and the largest MoM since February 2010. Since this includes closings in June and July, this suggests prices fell sharply for August 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 8.4%. The YoY increase in September was the same as in August.

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 seeing declines in both new and existing home sales due to higher mortgage rates. The NAR reported sales in September were at a “seasonally adjusted annual rate of 4.71 million in September. Year-over-year, sales waned by 23.8% (down from 6.18 million in September 2021).”

The early local market reports suggest a larger year-over-year decline in closed sales in October.

And the Census Bureau reported “Sales of new single‐family houses in September 2022 were at a seasonally adjusted annual rate of 603,000”, down 17.6% from September 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. Here is a table of selected public builders and the currently reported cancellation rate. Note that sharp increase from 2021 to Q3 2022.

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 again.

Next Friday, the NAR will release existing home sales for October. This report will likely show another sharp year-over-year decline in sales for October. 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). The CPI report this week showed some signs of inflation slowing, and it appears shelter will slow faster than the Fed currently expects - a positive for housing.

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