An Update on Housing
Back in April (HERE), we wrote a piece on housing in the US. Eight months later, we thought it was important to provide an update. To rewind the clock for a moment, in late April the 10-year treasury was yielding 2.87% and the 30-year fixed mortgage rate was 5.27%. At the time, existing home sales had just dropped below 6M units, on an annualized basis, which remained one of the highest levels post pandemic and also well above the highest levels after the housing boom and bust of 2006-2008. New home sales, likewise, were above pre-pandemic levels.
Since then, the 10-year treasury rose above 4% for a time and now sits 100bps higher than it did in late April. As a result, existing home sales have fallen 27% to match the lowest level of activity during the pandemic as well as some of the lowest levels of the housing crisis.
For all intents and purposes, housing is in a recession. The average 30-year fixed rate mortgage is more than a percent more expensive which has crushed affordability for many buyers. Mortgage rates are higher than at any point leading up to the financial/housing crisis of 2008/09.
Mortgage purchase applications had already fallen below early 2020 levels in April this year and have continued to fall further. Purchase applications are down another 25% since then and down 34% in 2022, below the lowest levels of activity during the pandemic.
New home sales, although representing only a fraction of all residential real estate transactions annually, are down more modestly. It is important to keep in mind that new home sales are recorded based on signed contracts versus existing home sales which are counted based on closings. As a result, new home sales are subject to large revisions if signed contracts do not end up closing, as is happening now.
The most important question is what the impact to prices has been with higher mortgage rates and lower sales. The median price of an existing home in the US is down 10% from the peak in June of this year, but prices remain more than 3% higher than they were a year earlier.
With existing and new home sales down nearly 40% from the highs, what has kept prices propped up is simply supply. Despite sales falling to the lowest levels of the past decade and a half, supply is still lower today than at any point since the National Association of Relators started tracking months’ supply, except for the past two years. Without a meaningful uptick in supply, prices might not decline materially from here. Historically, six months of supply was considered a balanced market where prices neither increase nor decline.
Housing starts, which were making new cycle highs in April, have since dropped 20%. They will likely drop further in 2023 as builders reduce inventory and owned lots. Household formation has also declined this year which will require further cuts in housing starts as well.
In 2023, we will be watching supply to give us an indication of the direction prices might head. We expect housing prices to be down around 5% and months’ supply to rise to above 5 months. Interest rates will have a big role to play, and as long as mortgage rates are above 5% we expect supply to grow. The pace of growth will be heavily influenced by how long rates stay at restrictive levels. The quicker rates return to more normal levels the more modest the decline in prices will be.
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