Writing on Capital Matters a day or so ago, Kevin Hassett took a look at where the housing market was going.
In the course of his article, he noted that
The Fed’s actions are harming the housing market. Take, for example, the 30-year FHA mortgage rate, which was about 4 percent at the beginning of March, but is at almost 6 percent today. In 2020, that same rate was about 3 percent. The interest-rate jump, plus the increase in prices, has reduced housing affordability, and the carnage is beginning to be visible in market activity. For example, the National Association of Homebuilders conducts a sentiment survey of its members. It had steadily declined over the past five months, and then it plummeted in May. New home sales were down 8.5 percent in March, and are likely down much more in April and May.
If you are a home builder or home buyer, these numbers are terrifying.
And down the April numbers have gone.
New home sales plunged in April, falling 16.6% from March, to 591,000, well below economists’ forecast of 750,000, according to data out Tuesday. It’s the slowest pace since April 2020 — when the economy froze for a minute before the boom began.
Existing home sales — perhaps a better measure of the U.S. market because it’s a much larger segment — are also trending down, falling for three straight months, according to the National Association of Realtors.
In the course of his article, however, Kevin made the argument that, for homeowners, the fundamentals were not so frightening:
Historically, one of the biggest threats to the value of existing homes is a surge in new construction. When construction booms, the supply of homes skyrockets, and prices of new and old homes fall to clear the market. Because of Covid, there has not been anything like the kind of construction boom that presages a collapse in prices. In 2008, for example, housing inventories climbed so much that there was a twelve months’ supply of homes on the market. Today, the supply of homes would be fully exhausted by six months of sales.
Back in 2008, housing prices did drop sharply to clear the market of all of that excess inventory.
Axios’s Matt Phillips noted that “the inventory of unsold newly built homes jumped sharply in April, up 8%, the largest monthly increase in 13 years. . . . Inventories are up 40% from the previous year.
But:
New home sales are actually a pretty small part of the overall U.S. housing market, compared to existing homes. And, at least through April, inventories of existing homes were still some of the lowest on record.
My best guess? While some of the froth may come off the market (prices are still at record highs), especially as the pandemic-linked mania wanes, a crash seems unlikely for now.
One sentence to remember (in particular) from Kevin’s article:
Stagflation is a strange thing in the housing market. The low growth wants to push the price down, but the inflation wants to push it up.
And stagflation is looking, I reckon, like an increasingly likely prospect.