The housing market has been weird for almost a year and now it appears to be on the verge of flipping that weirdness upside down.
Sales of existing homes, the largest part of the market, have been declining for eleven months, largely as a result of the Federal Reserve’s tighter monetary policy pushing up mortgage rates. At the same time, however, home prices have continued to climb.
The result of higher mortgage rates and higher prices has pummeled home affordability, which has pushed sales even lower. Many homeowners who might be tempted to sell are holding back because they would face a much higher rate on the mortgage of their next home. Some might face a higher monthly mortgage bill even on a substantially less expensive house simply because the interest cost has gone up so much.
Data from the National Association of Realtors released Friday show that we may be near the tipping point where this reverses. Sales are likely to start to climb and prices fall.
Compared with one year ago, December sales were down 34 percent, data from the National Association of Realtors showed Friday. It was the slowest year in nearly decade for home sales. Compared with a month earlier, sales were down 1.5 percent. Both were smaller than expected and indicate a slowdown in the pace of decline. The month-to-month decline annualized to a rate of 15.6 percent, half of the December-to-December decline. Full-year sales were down 17.8 percent compared with the prior year.
The inventory of houses for sale at the end of December was 970,000 units, which was down 13.4 percent from November. Compared with December of last year, however, inventory is up 10.2 percent. So, some of the tightness in inventory levels has eased over the past 12 months.
Financial conditions have eased in recent months, as the market has gone to war against the Fed’s prediction that it will hike its benchmark rate above five percent and keep it there for some time. Market prices now indicate the view that the Fed is likely to pause its hikes with the federal funds at a range between 4.75 percent and five percent, which would mean just two more 25-basis point hikes, and then start cutting in the latter half of the year.
The yield on 10-year Treasuries peaked in early November and then started falling. The mortgage rate tends to follow Treasury rates almost mechanically. So when long-dated Treasuries dropped, so did mortgage rates. The decline has been very significant. The average rate on the 30-year fixed mortgage topped out at 7.08 percent and is now down to 6.15 percent. For jumbo mortgages, the decline has been even steeper, from 7.198 percent to 6.152 percent. This has given a boost to home affordability.
This boost to home affordability is working counter to the Fed’s aim of tightening financial conditions. That could be interpreted as a warning that the Fed may have to tighten even more than it expected in order to slow down the economy to rebalance labor supply and demand to tame inflation. The market, however, has taken a contrary view and expects easier conditions ahead.
NAR chief economist Lawrence Yun said on Friday that he expects that we’re past peak mortgage rates and that home sales will start to rise.
“December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” Yun said. “However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”
One reason for this could be further improvements in inventory. A decline in rates makes trading up and down in the housing market easier, improving market liquidity. The empty-nesters with too much house can better afford the smaller house at six percent than they could at seven. Likewise, the growing family looking for a bigger house. That puts more inventory on the market for first time buyers.
So, what does this mean for home prices? The median existing-home price in December was $366,900, an increase of 2.3 percent from December 2021. That is a big slowdown in price gains from the year-over-year peak of 25.2 percent in May of 2021. Indeed, this is the smallest gain since May of 2020, when much of the market was frozen by pandemic lockdowns and worries about the economy. It seems likely that the trend will continue, tipping prices into negative territory sometime in the next few months, according to Bill McBride at Calculated Risk.
A year-over-year decline in the median home price does not, however, imply that we are heading for a crash. One of the advantages of a fixed rate mortgage is that it provides protection against high rates and price declines. This means there are few homeowners who might become forced sellers absent a severe downturn in the economy. Rather than sell their house at a large loss from a recent high, owners will simply hold out for a better market.