Focus
December 01, 2023 | 13:43
U.S. Home Sales Pummelled as Prices Pumped
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
U.S. Home Sales Pummelled as Prices Pumped |
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Existing home sales are plummeting owing to dramatically deteriorating affordability driven, in turn, by high and rising mortgage rates and home prices. Housing demand, decreased by higher borrowing costs, would typically correspond with falling prices, but housing supply has also decreased. |
U.S. existing home sales fell 4.1% to 3.79 million units (annualized) in October, the lowest level since 2010 (Chart 1). There have been only three months during this series’ 24-year history that volumes were worse. They occurred during or in the immediate aftermath of the Great Recession. And recall, it was a housing bubble bursting that partly triggered this. That existing home sales are now at their lowest level in more than 13 years and probing the post-bubble nadir is a testament to the power of mortgage rates. The Mortgage Bankers Association (MBA) reports that 30-year borrowing costs averaged 7.78% in October, the highest in 23 years (Chart 2). This is more than double the record lows—monthly averages in the 2.85% to 3.50% range—that ran from April 2020 until the end of 2021. Meanwhile, in October, mortgage applications for purchases dropped to their lowest level in almost 29 years. It’s unclear whether current monthly sales will ultimately fall below the low (there’s still 9.0% to go). Activity is looking like it’s starting to stabilize given the latest readings on pending home sales (those under contract but not yet closed which could take a month or two) and mortgage applications. Pending sales fell 1.5% in October after rising 1.0% in September, but mortgage applications increased 5.0% in November after falling for six straight months. It’s helping that 30-year mortgage rates averaged 28 bps lower in the month after rising for six consecutive months. The power of mortgage rates, indeed. |
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The recent rise in borrowing costs contributed to a sharp erosion in home affordability, which weakened the demand for housing. Figures compiled by the National Association of Realtors (NAR) show that mortgage payments as a percent of (median) family income were 26.7% in September (seasonally adjusted), the highest level in 38 years (since the mid-1980s) (Chart 3). And the ratio likely deteriorated further in October, with mortgage rates up 44 bps during the month and the other major driver of affordability—home prices—also up. |
The median price of existing home sales in October rose 0.6% to almost $397,000 (seasonality adjusted), establishing a new record high by surpassing May 2022’s peak. This pushed the yearly change up to 3.5% (Chart 4). After the onset of the pandemic, prices hit a low in May 2020 at just under $275,000. Given that existing home sales are registered when transactions are closed as opposed to when contracts are signed, and with a typical one-to-two-month interval between events, the recent low in prices reflected sales contracted mostly around the onset of the pandemic and lockdowns in March-April 2020. And the prior peak in prices reflected sales contracted mostly around when the Fed started to tighten in March-April 2022. Between these bookends, home prices rocketed 44% higher as mortgage rates spent nearly all the interim months running in a record-low range. Apart from being one of the most interest rate-sensitive sectors in the economy, housing demand was also boosted by pandemic-triggered shifts in tastes and preferences. For example, the work-from-home phenomenon prodded the demand for bigger abodes as rapid price rises stoked a sense of urgency (FOMO) among would-be buyers (particularly millennials). The consequent supercharged demand pushed homes available for sale to record lows and new home construction to its capacity (Chart 5). A lack of homes for sale and record-high homes under construction, delayed from completion due to shortages of materials and labour, became fertile ground for the fastest home price appreciation on record. The yearly change in median prices peaked above 25% in May 2021. The major repeat-sales metrics, FHFA and S&P CoreLogic Case-Shiller, also surged but peaked lower (near 19% and 21%, respectively) and later (July 2021 and April 2022, respectively). Mortgage rates (and underlying bond yields) began rising noticeably to start 2022 in anticipation of Fed tightening and the climbs steepened as the hikes commenced and then increased (recall the four consecutive 75 bp actions that started in June). Housing demand immediately buckled. By December 2022, sales were 36% below year-ago levels. Slower buying amid mostly range-bound new listings through June 2022 (according to Redfin) improved inventory availability for a few months. But as 30-year mortgage rates blew past 5½%, new listings began ebbing and homes for sale started sliding again, though only gradually at first. In turn, the median home price dropped more than 4% between May 2022 and April 2023, before turning up again (by 4.5% to the new record high in October). |
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It may be a long while before new listings rebound meaningfully unless mortgage rates drop a lot. After a near-two-year run in a record-low range and, before that, a decade-long run in a historically low range (thank you quantitative easing), the stock of existing mortgages has relatively low rates compared to current levels. According to a Redfin report published in June (based on 2022-end data): 91.5% of mortgaged homeowners have a rate below 6%. It was 82.4% for below 5%, 62.0% for below 4%, and 23.5% for below 3%. Replacing one of these mortgages with one sporting a 7% or 8% handle is keeping many would-be sellers from listing unless they are compelled to do so because, for example, they are moving to a new job or there is a change in their family situation. According to a Zillow report published in July, the inflection point below which homeowners would be more likely to move (and list) voluntarily lies between 4.00% and 5.00%, more than 250 bps below where 30-year mortgage rates averaged last month. |
Meantime, as existing homes available for sale have been depressed (which should continue for a while longer), would-be buyers are increasingly turning to the new home segment. It’s noteworthy that despite dismal overall housing demand conditions due to poor affordability, new home sales have been trending up lately (Chart 6). Bottom Line: Bond yields are drifting down in anticipation of eventual policy rate cuts, and this should continue as Fed easing is realized next year. Mortgage rates will follow suit, improving housing affordability and increasing the demand for homes. However, the erosion of affordability over the past three years has been so extreme that, short of massive reductions in mortgage rates and/or home prices, the demand response will probably be more restrained than in the past. |
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Furthermore, the multiyear run of historically/record-low mortgage rates has likely left a legacy of a more restrained response by would-be sellers to moderate rate reductions. This points to more upward pressure on existing home prices and more demand diversion to the new home segment, than would otherwise be the case. While this may cause homebuilders to cheer in the years ahead, it may also cause the Fed to lament as inflation pressures find a persistent home. |