After rebounding earlier this year, existing home sales fell for a second straight month in July. The correction is likely to continue in the coming months as existing home inventory remains depressed and demand is weakening. Using mortgage purchase applications as a proxy, existing home sales are likely to reach a 13-year low soon.
*This article was written by Christophe Barraud and was republished with consent.
Low Existing Home Inventory Maintains Prices High
The housing market is grappling with a concerning trend as the number of existing homes for sale has reached very low levels. This scarcity of listings, exacerbated by rising mortgage rates, has created a challenging environment for prospective buyers and has led to price increases since February. According to Realtor.com, “this past week marked the 9th consecutive decline in the number of homes actively for sale compared to the prior year (-7.2%), however the gap narrowed slightly compared to the previous week’s -8.6% figure.”
One of the primary reasons behind this decline is the reluctance of homeowners to sell their properties. Many homeowners are choosing to stay put, as moving would entail giving up their current, more affordable mortgage rates (“lock-in effect”). The average 30-year-fixed mortgage rate in August, more than doubled compared to August 2021. In this context, according to a Redfin report, “More than nine of every 10 (91.8%) US homeowners with mortgages have an interest rate below 6%”. In addition, the report also shows almost 60% of mortgage holders have a rate below 4%!
In a context where existing home inventory remains under pressure, existing home prices stay high. As reported by S&P CoreLogic Case-Shiller, existing home prices have rebounded since February 2023.
This phenomenom pushes homebuyers to look at new home sales for a larger choice. A recent Redfin report highlighted “Newly built homes made up nearly one-third (31.4%) of U.S. single-family homes on the market in the second quarter. That’s the highest share of any second quarter on record, with new construction keeping the housing market afloat amid the severe shortage of existing homes for sale.”
Demand Has Been Dampened By High Prices and Mortgage Rates
High prices coupled with higher mortgage rates are weighing on housing affordability and therefore demand. According to Bankrate.com‘s data, the 30-year fixed-rate mortgage reached 7.62% on Monday, the highest rate since September 2000, but slightly dropped to 7.61% on Friday. This level is significantly higher than in August 2021, when 30-Year fixed-rate mortgage averaged 3.03%.
Therefore, housing affordability remains under heavy pressure, implying a very low demand from first-time homebuyers. According to the U. of Michigan Consumer Sentiment survey, buying conditions for houses fell again in August, approaching a level seen only in two periods since 1960.
Without surprise, as reported by the Mortgage Bankers Association, for the week ending August 18, 2023, mortgage purchase applications decreased by 5.0% on a seasonally adjusted basis from the previous week (v -0.3% prior). The index dropped for a sixth straight week and was down 16.6% over the past eight weeks. It reached the lowest level April 1995, when the US population was ~70 million lower.
This situation is expected to have a significant effect on closed sales from August to October. As a matter of fact, according to the National Association of Realtors (NAR), the majority of transactions (existing home sales) are reported when the sales contract is closed. Most transactions usually involve a mortgage which takes 30-60 days to close. That’s why I think existing home sales will fall further in the coming months, reaching a 13-year low.
About the Author:
Christophe Barraud is Chief Economist and Strategist at Market Securities. He has been awarded by Bloomberg the title of Top Forecaster of the U.S. Economy (from 2012 to 2020 and in 2022), Eurozone Economy (from 2015 to 2019 and in 2022) and Chinese Economy (from 2017 to 2020). He also won the latest Forecaster of the Year contest organized by MarketWatch in 2020. Since 2021, he has been Adjunct Lecturer at ESCP in the MSc Finance, which has been ranked first worldwide in the 2023 Financial Times Masters in Finance ranking.