“What Happened with Durable Goods is Now Happening with Housing”

Authors: Vicente Nieves / Mario Becedas

The housing market in the US is showing clear signs of cooling down, which could lead to a downturn or correction. The rise in mortgage interest rates, which follow the increases in the Federal Reserve’s interest rates, is cooling a market that was previously very hot. The major risk for the real estate sector is that, similar to what is happening in other markets, there could be a complete reversal of the prevailing trend. This means that supply could significantly exceed demand, leading to a price correction. There are already some signs of this trend, according to experts.

Several key indicators, some of which are leading, are starting to show cracks in the US housing market. Although there is high uncertainty regarding the future of property prices (with factors pushing prices both up and down), it seems clear that the sharp price increases and scarcity are coming to an end.

On one hand, new home sales in the US fell in July for the fifth consecutive month, reaching the slowest sales pace since early 2016. Thus, the housing market has been deteriorating and cooling down for months, driven by higher financing costs (with increasingly higher mortgage rates) and the impact of economic uncertainty on demand.

New Homes

Sales of new single-family homes decreased by 12.6% on an annualized basis, to 511,000 from the 585,000 revised in June, according to the latest data. The July sales slump is the latest example of how the housing market is yielding under the weight of high prices and elevated loan costs.

Construction companies are starting to factor these data into their investment decisions gradually, reducing the building of new units, but the homes that have already been started should still be completed despite the cooling demand.

Oxford Economics explains that the supply of new homes for sale increased by 2.2% in June to 457,000, the highest amount since April 2008. This inventory translates to a 9.3-month supply, compared to 8.4 months in May.

This is beginning to be reflected in the monthly price (not yet on an annual basis). Oxford experts note that the median price of new homes fell by 9.5% month-over-month in June to an average of $402,000 (a first sign of weakness), although the year-over-year price is still up by 7.4%, which reflects a sharp slowdown from the 13.7% annual rate in May.

Existing Homes

But it’s not just new homes; existing homes are also starting to pile up. With both markets seeing an increase in inventory (homes on the market seeking buyers), prices could soon face significant downward pressure.

Unsold Inventory

Existing home sales in the US in July fell by 5.9% from June and by 20.2% compared to the same month in 2021, to an annualized figure of 4.81 million, extending the decline in transaction numbers to six consecutive months, according to data from the National Association of Realtors (NAR).

The total inventory of existing homes available for sale at the end of July was 1.31 million units, an increase of 4.8% from June and unchanged from the previous year. The unsold inventory would be enough to cover 3.3 months of demand at the current sales pace, compared to 2.9 months in June and 2.6 months in July 2021. This has raised some concerns among experts.

“Just as with durable goods, a similar dynamic is now occurring in the housing sector. New homes under construction remain at record levels! Meanwhile, sales of used homes have dropped to their lowest level since 2015 (excluding the pandemic), reflecting the significant decline in housing affordability (defined as the median family income relative to the cost of a mortgage). The number of potential buyers seems to be shrinking,” says Troy Ludtka, economist at Natixis.

“As a result, inventories will surge and put downward pressure on home prices. We estimate that home prices could fall by 7.5% nationally by mid-2023. Such a significant negative wealth effect would further dampen consumer spending,” says the Oxford Economics expert.

This, in turn, will negatively impact the economy, as residential investment will suffer, reducing its contribution to GDP growth. “Homebuilders will slow down the construction of new homes in the coming months, particularly for individual units… housing is a sector with a significant economic multiplier, and its drag would be substantial for the macroeconomy,” concludes the Natixis expert.

The continuing data confirms the worsening trend in the housing market. The tightening of financial conditions is evident in the statistics being reported. The 30-year mortgage interest rate, calculated by the MBA (Mortgage Bankers Association), rose last week to 5.8% from the previous 5.65%. In August, it has risen sharply again, approaching the peak of 5.98% recorded at the end of June after having dropped to 5.4% at the end of July. At the beginning of the year, this rate was at 3%.

Furthermore, the mortgage application index, also estimated by the MBA, fell a significant 3.7% last week (-1.2% the previous week). The MBA’s purchase index is now below 200 points, a level not seen, except for the COVID-19 outbreak, since 2015.