Current State of the Housing Market

In Transition

This is a market overview. There are clear signs of a market shift. A few quotes:

From Denver Metro Association of Realtors® “modest numbers this month became a sign that the market has returned to a semblance of ‘normal.’”

From Las Vegas: “The slowdown in sales and increase in our housing supply are signs that things may be starting to calm down a bit.” [LVR President Brandon] Roberts

From Seattle area: Mike Larson, a member of the board of directors at Northwest Multiple Listing Service described the market as "more balanced and not so crazy”.

House Prices

Reported house price growth is still very strong, and the Case-Shiller National Index will show 20%+ year-over-year growth for April (to be released on June 28th). The recent slowdown will take some time to show up in the price indexes, see: When will House Price Growth Slow?

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 the story right now.

Note the dark red line on the graph below. The percent of recent price reductions is still below normal for this time of year but increasing quicky - and it is well above last year at this time, and also above the level in 2020. This is an early indicator of the coming slowdown in house price growth.

Mike Simonsen 🐉 @mikesimonsen

Price reductions! That's the story of the US real estate market now. While still fewer than normal, more sellers are cutting prices every day. We talk about what it means in this week's @AltosResearch market video. Up to 24.1% of the market with price cuts. 📽️🧵👇 1/7

Here is my recent outlook for house prices: What will Happen with House Prices?

Inventory

The NAR reported inventory was down 10.4% year-over-year in April. Since then, other sources, such as Altos Research and Realtor.com, indicate active inventory was up year-over-year in May. I expect the local market reports will show inventory up year-over-year in May too.

It is important to realize inventory is still very low. Here is a graph from Realtor.com’s May 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 that inventory was declining rapidly for most of 2020, and it is very likely that inventory will be up compared to 2020 later this year.

Inventory is key and I follow the changes in inventory closely. For a discussion, see: Inventory will Tell the Tale

For new homes, there are 5.9 months of homes under construction - well above the normal level. 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 1.641 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).

Sales

We are starting to see declines in both new and existing home sales due to higher mortgage rates. The NAR reported sales in April were at “a seasonally adjusted annual rate of 5.61 million in April. Year-over-year, sales dropped 5.9% (5.96 million in April 2021).”

And the Census Bureau reported “Sales of new single‐family houses in April 2022 were at a seasonally adjusted annual rate of 591,000 … This is 16.6 percent below the revised March rate of 709,000 and is 26.9 percent below the April 2021 estimate of 809,000.”

Mortgage Rates

30-year mortgage rates have stabilized recently around 5.5%, after increasing sharply over the last few months. Here is a graph from MortgageNewsDaily. I’ll have more on rates soon.

Delinquencies and Foreclosures

The good news is delinquencies are at record lows. From Black Knight: “The national delinquency rate fell to 2.8% in April, down four basis points from March, hitting a new record low for the second consecutive month”

And on foreclosures, see: Update: Delinquencies, Foreclosures and REO The bottom line is there will be an increase in foreclosures this year (from record low levels), but it will not be a huge wave of foreclosures as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.

Conclusions

We are seeing a clear shift 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. 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.