The current dynamics in the housing market are unlike anything seen in decades, if ever. Prices are at all time highs, supply is scarce, rates are rising and refi activity has plummeted. Housing faces a set of headwinds AND tailwinds at the same time, creating a pressure cooker in a very important sector of the economy.
The median price of an existing home sold in March was up 15% percent to a record of $375k. Total homes for sale at the end of last month was 950K, a 2 month supply of inventory. The rates on a 30 year fixed mortgage have gone up about 200 basis points since the beginning of the year, from slightly above 3% to over 5% currently. Refi activity has plunged almost 70% in the last year.
The opinions of the housing market range from one extreme to another. Some are calling for a complete bust as prices have reached unsustainable levels and can’t possibly go any higher. Others look at lack of supply and an economy flush with cash and see only continued price appreciation, especially in the face of break neck inflation. The reality, in my opinion, will likely be a crushing slow down in any activity related to housing.
With interest rates at 5.35%, most homeowners who could benefit from a refi (usually a 1%+ rate improvement) have either done it already, or it no longer makes sense to. This is after a paltry 25 basis point hike by the FED. Once a couple of 50 basis point moves happen and rates hit 6.5-7%, refi volume is going to dry up. One year ago refinances made up 61% of total mortgage activity, today that number is 35%, and has been decreasing at almost double digit levels for months.
On the purchase side, mortgage applications are down 17% in the last year and were down 8.3% week over week. Pending sales have been down 5 months in a row. March sales were down 4.5% and listings were down 9.5%. Activity on the buying side has been hampered by increased rates and increased prices at the same time. A 1% increase in interest rates typically equates to a loss of 10% in buying power. Rates have gone up over 2% YTD and prices are up almost 20% in the last year. Buyers, who were already fighting an uphill battle, are getting pummeled on both sides of the equation.
The stress in the purchase and refi sides of the housing market is starting to show itself in terms of how deals are financed. Cash has always been king in real estate, and is no different now with 28% of sales being cash. The good old ARM has made its way back into the picture, currently making up 9% of total loan count and 17% of dollar volume. This doesn’t portend a 2008 like collapse by any means, but it is an interesting development. A 5 year ARM is currently about 1% lower than a fixed rate, making it an option in a rising price and rate world.
Housing inventory country-wide is estimated to be 4 million units short of demand. The CEO of the National Association of Home Builders (NAHB) just came out appealing to the government for help to stave off a recession in housing as the market continues to slow down on all fronts. There is a real irony to this, as the homebuilders have already plotted a course through these times. A look at building permits shows that permits for single family homes are -4.8% in the last month. Compare that to permits for buildings with 5+ units, which are up 10.9%. Housing starts show a similar trend with single family starts -1.7% while starts for construction of 5+ units are up 7.5%. There are no signs on the horizon that inventory issues are going to change.
The net result of this will be a massive slow down in housing. This may lead to price drops, but prices may also keep going up due to cash purchases and lack of supply. Overall volume is going to drop to levels that will make it hard for any type of significant move in price, either way. Large buying volume relative to supply is what is needed to keep prices ripping like they have been for years. But that volume is shrinking fast. Conversely, large selling volume relative to supply is needed to lower prices in any meaningful way. But who is going to sell their house that has a sub 4% rate to buy another equally inflated house at over 5%??? For those reasons, I don’t see any scenario that housing doesn’t just slowly grind to a halt….
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