The median existing house price reached a new peak in June ($416,000), a 13.4 percent increase over the year. As Reuters notes, this was “ the 23rd straight month of double-digit annual price gains, the longest such run since the late 1970s.” Interestingly, that was another period of high inflation: Make of that what you will, but before coming to a conclusion, check out the article by Allison Schrager that I discuss below.
Meanwhile, signs of unease continue to keep cropping up.
A gauge of US homebuilder sentiment declined for an eighth-straight month, marking the worst stretch since the housing market collapsed in 2007 amid higher borrowing costs and elevated prices.
The National Association of Home Buyers/Wells Fargo gauge decreased by 6 points to 49 in August, figures showed Monday. The reading was worse than the most downbeat estimate in a Bloomberg survey of economists and below the breakeven measure of 50 for the first time since May 2020.
Builder confidence is tumbling as high mortgage rates exacerbate affordability challenges, on top of elevated costs of materials and labor. Buyers are retreating, leading to an increase in housing inventory and a drop in new construction activity.
And from Bloomberg a week ago:
In an American housing market that for years has been plagued by too little inventory, builders are suddenly finding themselves with a glut of unsold homes.
This year’s surge in mortgage rates tossed buyers to the sidelines. The waitlists for new houses are gone. And new-home sellers such as Kevin Brown, who works just south of Houston, are on the front lines of a massive shift.
Also (again via Bloomberg, last week):
The supply of homes for sale across the US grew at a record rate last month, another sign that higher mortgage costs are cooling down the housing market.
The number of active listings nationwide jumped 31% from a year earlier, a record-high increase for a third straight month, according to a report Tuesday by Realtor.com.
Overall, however, inventories are still well below pre-Covid levels, something that will be helping prices. Which is bad news for potential buyers, particularly those looking for their first home, and that keeps the pressure on rents.
Meanwhile Allison Schrager (also on Bloomberg) takes a step back and looks at the impact of ultra-low interest rates on the housing market, adding as she does so an interesting twist.
Before turning to that, I’d add that, on the assumption that interest rates (more generally, not mortgages specifically) do return to a more normalized level after a period in which they were at a 4,000-year low, the consequences are likely to be . . . interesting. I’ve worried for some time about the impact of ultra-low rates: We may not have to wait too long before discovering how expensive cheap money really was.
But back to Schrager:
The real estate market has been on a wild ride. House prices, measured by the Case-Schiller index, increased 30% between March 2020 and December 2021, a steeper rise than the lead-up to end the housing bubble in 2008. This was in part because many people moved during the pandemic, but also because the 30-year mortgage rate was only 2.65% in spring of 2021.
The impact of the Fed’s interference may be felt for years. In the spring of 2020, the Fed was desperate to avoid economic collapse, so it reverted to its 2008 playbook. It cut rates to zero and brought back quantitative easing, buying long-dated government bonds and mortgage-backed securities (MBS). Most residential mortgages are securitized by Fannie Mae or Freddie Mac, and resold in what is known as an agency MBS.
In 2020, the mortgage-backed security market was in trouble, and the Fed was even more aggressive than it was in 2008. It effectively became the only ultimate buyer of these securities: Its holdings of agency MBS increased by $1.3 trillion between 2020 and 2022, while the market for agency mortgage-backed securities grew by $1.5 trillion. The Federal Reserve now holds more than 40% of the total outstanding amount of agency MBS, or nearly half the market. . . .
Buying mortgage-backed securities may have made sense in spring 2020, but why the Fed did not start tapering for 18 months, even as the housing market was clearly overheating, was never explained.
Even though the Fed has ended QE, its role in fueling the screwy housing market may last for the next decade. The Fed would like to shrink the size of its MBS portfolio. So far it plans to do so by not reinvesting all the securities as mortgages are paid off.
But higher rates mean fewer people will refinance or move, so the mortgage portfolio won’t shrink as fast as the Fed anticipates. There are some whispers about the Fed selling some of its mortgage-backed securities. If that’s the case, Charles Schwab expects the MBS spread [over 10-year bonds] will grow even larger, and odds are so will your mortgage rates.
Schrager adds:
There will also be a hangover from the very low rates in 2020 and 2021. Like many people, I bought a home in the spring of 2021. Now between rising rates and a slower housing market, I am not sure I can ever afford to move. The housing market may be slower and less liquid for a long time.
Mess with a market, in this case the market for money (and thus its price), at your peril.