‘There’s nothing in the data that shows prices crash’: U.S. housing market is showing remarkable resilience.

MarketWatch July 18, 2023

Seller

‘There’s nothing in the data that shows prices crash’: U.S. housing market is showing remarkable resilience.

The housing market may feel out of whack to home buyers coping with fast-rising home prices and 7% mortgage rates. But like it or not, the housing market is in the pink. 

Several economic indicators that measure housing activity — from home prices to sentiment surveys — show that home builders and sellers (the few that are out there) are finding strong demand from buyers. 

News of the housing market’s relative health may be welcome to some — like real estate agents and investors — but it’s becoming a concern for economists. The more buoyant the housing market, economists say, the more likely the U.S. Federal Reserve will unveil another interest-rate hike, which further heightens the risk of a recession.

‘The housing market has started to recover, and this is a problem for the Fed because more demand for housing will boost home prices and rents.’

— Torsten Slok, chief economist at Apollo

“The housing market has started to recover, and this is a problem for the Fed because more demand for housing will boost home prices and rents,” Torsten Slok, chief economist at Apollo, wrote in a note in May. And housing is a big part of how the government measures inflation, he added. This will make it more difficult to reduce inflation from 5% to the Fed’s 2% inflation target, he said.

If the Fed announces another rate hike, it would push mortgage rates, which are already in the 7% range, even higher. 

“The housing market is in a very — if fragile — recovery,” Mike Simonsen, founder, and president of real-estate analytics firm Altos Research, told MarketWatch. 

“There appears to be more demand than available supply for homes, especially in the real estate market,” which is keeping home prices high, he said, but that doesn’t mean demand would evaporate if the current situation changes.

When rates doubled from pandemic-era lows in 2021 to 7% last year, it zapped home-buying momentum. Although house hunters have adjusted their expectations, if rates were to jump from 7% today to even higher levels, “I would not be at all surprised if homebuyers stopped abruptly again,” Simonsen said.

Americans broadly expect rates to go over 8%, according to a March survey by the New York Federal Reserve.

 

Active listings are down — blame interest rates 

Redfin’s deputy chief economist, Taylor Marr, said his go-to indicator was active listings. 

Active listings are down this spring, compared to the previous year, according to the company’s data. At the end of June, the number of homes listed for sale on the market was down 8.1% over the prior year.

“It really captures that supply is pulling back significantly relative to demand,” Marr said.

About 14 million mortgages were refinanced during the COVID-19 pandemic. Few homeowners find it in their interest to sell their homes and give up an ultra-low mortgage rate they secured during that time. Selling a home in July 2023, and purchasing a new one may entail taking a mortgage rate in the 7% range.

REDFIN DATA SAYS THAT ACTIVE LISTINGS OF HOMES ARE DOWN.

As a result, the housing market is seeing an excess of demand and not enough supply, which has led to a resurgence of bidding wars in some parts of the U.S.

While this metric is showing signs of the housing market returning to life and heating up amid a shortage of houses for sale, Marr said he’s not yet ready to call it a recovery. “It’s hard to declare completely the bottom of the housing market,” he said.

Still battle-scarred by the housing crash of the Great Recession, Marr said economists “might be hesitant” to say that the housing market is in recovery mode. “We still have a lot of uncertainty with the economy ahead,” he added. “If the economy really takes a turn three or four months from now for whatever reason, it could certainly bring the housing market back lower than it was even last November,” he added.

 

The price gap between new and existing homes

With a major shortage of resale homes, new-home sales have been taking off. 

Home builders, understandably, are thrilled about the inventory shortage. 

The National Association of Home Builders measures builders’ sentiment in a monthly index, and that indicator has been very cheery of late. In June, the index turned positive for the first time in nearly a year. Builders were scaling back price reductions; they were happy about current sales conditions as well as sales over the next six months, the NAHB said.

“A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” said Rob Dietz, chief economist of the NAHB.

One of the major U.S. home builders, Lennar, also offered some commentary on its second-quarter earnings call last month. The company’s executive chairman, Stuart Miller, said that “the market and the economy will remain constructive for home builders as pent-up demand continues to come to market and consume affordable offerings.”

Miller also doesn’t expect the supply issue to be fixed anytime soon: “We believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance,” he said on the call. “The core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve.”

Home-builder confidence, as a result, is signaling high optimism about the future of the housing market, and a return to normalcy.

As a result, housing starts have spiked as builders scramble to meet the demand. 

BUILDERS HAVE RAMPED UP BUILDING NEW SINGLE-FAMILY AND MULTI-FAMILY HOMES.

Ali Wolf, chief economist at Zonda, looks at how prices of new homes trend relative to resale homes as a key indicator of the health of the housing market. Her conclusion? Housing industry professionals involved in the construction and sale of new homes are out of a recession, given the robust demand. 

In fact, demand has been so strong that new homes — generally considered to be more expensive than resales — have become more affordable in-home buyers’ eyes given the competition in the existing home space. 

Typically, new homes are 20% more expensive than resales, Wolf said.  And today? That spread has fallen to 4%. 

So what’s going on? Builders are not necessarily slashing prices. Instead, existing home prices have risen as homeowners are reluctant to sell.

That’s a good deal for buyers. New homes, Wolf said, are traditionally considered a “luxury good.” They’re brand new, and buyers can often customize them. They also require less maintenance than older homes.

 

Sellers are holding out on cutting prices

Simonsen, who leads Altos Research, said price cuts were his go-to indicator to gauge the health of the real estate market. Specifically, price cuts formed a proxy for demand, he explained.

“When the houses are on the market, if there are no buyers for the current houses that are listed, people start taking price cuts,” Simonsen said. 

And to be clear, price cuts jumped last year when rates jumped, he added. 

But that dynamic has since changed, as seen in the chart below. “There are currently fewer price reductions now than in 2018 or 2019,” Simonsen said.

DATA FROM REDFIN SAYS THAT HOMEOWNERS AREN’T CUTTING PRICES ON THEIR HOMES WHEN SELLING, POSSIBLY DUE TO STRONG INTEREST FROM BUYERS.

And for those of you holding out for home prices to crash? Keep waiting, Simonsen said.

“There’s nothing in the data that shows prices crash,” he said. Even if a recession hits at the end of the year, which results in more job layoffs, demand for home-buying falling, and an increase in foreclosures and distress, that’s still a few years from now, he added. 

“There’s no signal of home prices crashing anywhere,” Simonsen added.


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