Tremors: More Housing Weakness

In the most recent Capital Letter, I noted how housing should be included in the list of sectors where stress was emerging as we adjust from the dangerously deceptive world of ultra-low interest rates (a phenomenon that was always going to lead to trouble) to a more “normal” environment — in nominal terms anyway. There have been plenty of negative data points already, but now we can add the latest: pending home sales.

CNBC:

Pending home sales, a measure of signed contracts on existing homes, dropped a much worse-than-expected 10.2% in September from August, according to the National Association of Realtors.

Economists had predicted a 4% drop. Sales were down 31% year over year.

This marks the lowest level on the pending sales index since June 2010, excluding April 2020, when the Covid pandemic was in its early days. . . .

Realtors point squarely to sharply higher mortgage rates, which had sat at record lows for the first two years of the pandemic. The average rate on the popular 30-year fixed mortgage was right around 3% at the start of this year, but then rose swiftly, crossing 6% in June, according to Mortgage News Daily. It pulled back a bit in July and August, but then began rising again, crossing 7% in September, when these contracts were signed.

Note this too:

Mortgage demand and new listings are dropping, too, because homeowners are unwilling to give up their record-low interest rates to trade up to a much higher one. For potential buyers, the increase in rates means the monthly payment on a median priced home, with a 20% down payment, is now close to $1,000 higher than it was in January.

“With wages falling behind on account of inflation, and rates rising, buyers’ purchasing power has been reduced by over $100,000,” said George Ratiu, senior economist at Realtor.com.

I touched on the unwillingness to move in the Capital Letter, but, of course, not everybody has the luxury of being able to stay put. Some will have to move, because, say, they have (or want) to take a new job elsewhere. It’s hard to avoid the suspicion, however, that others are being dissuaded from changing jobs because of the cost of relocation — something that’s not particularly helpful to employers already struggling to find workers in the current jobs market.

On the other hand, if the labor market cools (the latest JOLTS data clearly signaled that this — or worse — is on the way), job-seekers who find themselves out of work may find that they have no choice other than to move, and that may well be expensive, making a bad situation worse:

While red-hot home prices are starting to cool and even drop in some local markets, the decline is not enough to make up for the increase in interest rates. Home prices are up more than 40% since the start of the pandemic, fueled largely by those rock-bottom interest rates early on.

Another thing to ponder: Is the possibility of a recession beginning to lead some would-be purchasers to stay put for now?

Earlier this week, it was revealed that newly built home sales had fallen sharply as well, down, in fact (for those keeping count) to 1996 levels, a time when the U.S. population was around 269 million as opposed to 335 million today.

The Wall Street Journal (October 26):

Sales of newly built homes dropped sharply in September from the previous month, the latest sign that rising interest rates are causing an abrupt slowdown in the housing market.

New-home sales fell 10.9% in September from August to a seasonally adjusted annual rate of 603,000, the Commerce Department said Wednesday. From a year earlier, new-home sales fell 17.6%.

While new-home sales figures can be volatile and are often revised, the decline in September marks the fourth time in 2022 that these sales have fallen by 10% or more from the prior month. The September decline was the biggest since a 12.4% drop in April.

The decline in new-home sales follows other recent data signaling the market’s weakness after a nearly two-year housing boom. Existing-home sales have fallen for eight straight months.

And note:

Mortgage applications to purchase homes also fell 42% from a year earlier in the week ended Oct. 21, according to the Mortgage Bankers Association, while a measure of home-builder confidence has steadily weakened in recent months.

Another data point (via the New York Times, October 27)

[T]he volume of mortgage locks in September — that is, when applicants lock in a particular rate — fell nearly 60 percent from the same month last year, according to Black Knight, a data firm that tracks the mortgage market. Locks on mortgages for home purchases were down nearly 30 percent, while refinancing activity was 93 percent lower.

And housing cannot be seen in isolation. It’s generally said to account for around 15-20 percent of GDP. And so (via Insider):

The housing market was a big drag on economic growth, and analysts don’t expect the tide to turn in the short term.

While the latest GDP data show the overall US economy returned to growth in the third quarter, residential investment sank 26.4%. That metric is an essential gauge of homebuilding and related activity in the housing market.

And when combined with nonresidential structures, fixed investments in those categories were the largest detractors on economic activity during the quarter, according to Michael Reynolds, vice president of investment strategy at Glenmede, who noted that activity in the sector is typically very sensitive to changes in rates.

It seems that housing prices have some way down to go yet. The question for me is whether we are seeing a reasonably “regular” housing downturn (made more dramatic after the pandemic-related surge in house prices) or the beginning of a broader de-rating now that the end of the era of ultra-low interest rates is behind us.