Shifting Hous­ing Num­bers: What You Should Know

De­spite the great­est tur­bu­lence in the hous­ing mar­ket since the 1980’s, it has proven re­silient. While real estate prices have al­ways been on the rise, as dis­cussed pre­vi­ous­ly, we dis­miss it. This ap­plies to home sales as well, though sales dis­play a quick­er im­pact.

The chart be­low dis­plays this last decade's great­est rate spikes in con­junc­tion with New Home Sales and home prices. Com­par­ing to 2022, some of these spikes look sig­nif­i­cant­ly small­er. It has been ar­gued that prices plateaued in 2018 while rates were still on the rise, though the sales front is the only places see­ing an im­me­di­ate im­pact. Even then it is min­i­mal.

It is un­clear where this re­silience came from in the past, what is clear though is that there is sig­nif­i­cant shift and change cur­rent­ly and it is hap­pen­ing QUICK­LY.

Last month alone, New Home Sales were record­ed high­er than any oth­er time in the past 12 years. This week’s new num­bers tak­en from the Cen­sus Bu­reau, New Home Sales dropped dras­ti­cal­ly, hit­ting al­most the lev­els lev­els in 5+ years.

What ap­peared even worse were the Pend­ing Home Sales, tak­en only two days after the New Home Sales date:

There is no one way to be­gin di­gest­ing this, none of which are shock­ing or dif­fi­cult to un­der­stand.

1. The surge in prices is un­sus­tain­able.

This goes for ex­ist­ing homes as well as new­ly built homes. This surge is record­ed as the fastest price hike.

This could have nev­er con­tin­ued though, even if the rates did re­main at a low. One rea­son is a dra­mat­i­cal­ly less ag­gres­sive wage growth.

2. Rates have shot through the sky.

Rates ris­ing at such a rapid speed solidify the need for a break in the hous­ing mar­ket. While we ques­tion how these prices con­tin­ue to grow, the rates re­al­ly did not start this growth un­til most of the re­cent pric­ing gains were set.

3. This is a very un­usu­al com­bi­na­tion we are see­ing be­tween price growth and high­er rates.

The jux­ta­po­si­tion in the end helps us accommodate the drop in sales for affordability.

4. While in the past, in­ven­to­ry has held back the hous­ing mar­ket, inventory isn’t re­al­ly help­ing.

It is cur­rent­ly dependent on two fac­tors: geography and price range. It is uni­ver­sal­ly true when talk­ing about ex­ist­ing home sales compared with new homes, de­spite the new housing in­ven­to­ry having recovered (tech­ni­cal­ly speak­ing).

This begs the ques­tion, is in­ven­to­ry no longer an is­sue con­sid­er­ing home sales? Not quite. As a re­minder we are only talk­ing about new homes. Ear­ly in the pan­dem­ic, the mar­ket car­ried most of the weight when ex­ist­ing homes were near­ly non-ex­is­tent.

Now in the midst of ris­ing ma­te­r­i­al costs, un­con­trolled ap­pre­ci­ate, and height­ened rates, they are suf­fer­ing. All of this com­bined cre­ates an in­tense af­ford­abil­i­ty is­sue, which has even caused new homes to be out of reach to buy­ers. Fi­nal­ly, while new homes may be “avail­able for pur­chase”, they are not built yet.

What may be the most im­por­tant take­away when try­ing to grasp in­ven­to­ry is­sues is the whole pic­ture of new vs ex­ist­ing home sales. The chart be­low ar­tic­u­lates this visually:

Keep­ing this pic­ture in mind, which shows roughly 10 times more ex­ist­ing homes in com­par­i­son to new homes. Here is how housing in­ven­to­ry con­trasts.

Note: this is a sea­son­ally adjusted con­sid­er­a­tion for the uptick.

So what’s the bot­tom line?

De­spite the sug­gest­ed drop in the New Home Sales, the hous­ing mar­ket hasn’t made the turn. That be­ing said, there are still signs of the market cool­ing in the future.

This week alone, the Na­tion­al As­so­ci­a­tion of Re­al­tors (NAR) record­ed a slight spike in in­ven­to­ry in com­par­i­son to the same week last year. Homes for sale were up 9% year-over-year. This is the quick­est record­ed pace from NAR since they be­gan record­ing data in 2017.

This is a promis­ing sight to see.

For reasons we know and un­der­stand, hous­ing got over­ly hot. A time of cool­ing and in­ven­to­ry is not only wel­come, but need­ed. In order to slow down and see even a glimpse of af­ford­abil­i­ty, we need to see price gains.

While talk­ing about cool­ing down prices, rates are also a key part of the affordability equa­tion.

The in­fla­tion data this week dis­played a rea­son­able state­ment for not only the head­line price in­dex, but the “core” in­dex as well, ex­clud­ing food and en­er­gy. This is the very first time this has happened since we saw the be­gin­ning of in­fla­tion in ear­ly 2021.

Why does this mat­ter?

The bond mar­ket (this de­ter­mines rates) fi­nal­ly came to a point where traders took into con­sid­er­a­tion rates ris­ing enough to jus­ti­fy the in­fla­tion out­look, as well as the Fed­er­al Re­serve’s re­sponse to the re­cent in­fla­tion. Look­ing at the next six months, traders are think­ing flat­ter and flat­ter fu­ture lev­els when it comes to the Fed Funds rate.

Di­rect­ly the Fed Funds rate does not af­fect longer term rates, like mort­gages and 10yr Trea­sury yields. Al­though Fed rate EX­PEC­TA­TIONS cor­re­late sig­nif­i­cant­ly bet­ter. To think of it in an­oth­er way, as the ex­pec­ta­tion of federal rates hikes plateau, longer-term rates will as well.

The chart be­low dis­plays the same or­ange line from the above chart, and in­cludes the 10yr Trea­sury yields.

The past month has shown bonds and stocks mov­ing in lock step. Dis­play­ing resilience for bonds as well in this bounce of the stock mar­ket.

Is this some­thing to be ex­cit­ed for? Or to be fear­ful of.

This is something to be excited about, but bear in mind that there is no cer­tain­ty in this. What mat­ters at the end of the day is that this is the very first time we are see­ing this in 2022. We are able to se­ri­ous­ly en­ter­tain a change from rates shoot­ing ver­ti­cal­ly to stay­ing horizontal.

There is no guar­an­tee in en­ter­tain­ing this though, we need to keep that in mind. We can­not say with cer­tain­ty that there won’t be days that make us sec­ond guess this di­rec­tion!

Ul­ti­mate­ly, the cur­rent di­rec­tion will be so­lid­i­fied by more data that we have come in. This will take some time though, like­ly a few months, to tru­ly get a grasp of the impact in Ukraine-re­lat­ed com­mod­i­ty price shocks.