Friday, March 18, 2022

Home Sales Playing Catchup

 The Mortgage Corner

Rising interest rates are slowing housing sales, with interest rates up more than one percent since last year, though still in the affordable range. This is while inventories can’t keep up with red-hot demand from homebuyers.

“Total housing inventory at the end of February totaled 870,000 units, up 2.4% from January and down 15.5 percent from one year ago (1.03 million). Unsold inventory sits at a 1.7-month supply at the current sales pace, up from the record-low supply in January of 1.6 months and down from 2.0 months in February 2021,” said Calculated Risk’s Bill McBride.

The combination of record demand and record low interest rates since 2018 (see below FRED Graph) has caused prices to soar in double digits, making home buying less affordable for many first-time homebuyers and exacerbating the housing shortage.


However, the 30-year conforming fixed rate is still at 4.0 percent, and 4.25 percent for super-conforming 30-year fixed, which means financing is still affordable for middle-class households.

Fixed rates began their decline below 6 percent at the end of the Great Recession and housing bubble (gray bar in graph) thanks mainly to former Fed Chair Ben Bernanke’s QE policy of purchasing Treasury and mortgage-backed securities.

The Fed is now reversing that policy to combat inflation, hence the rising interest rates. And builders aren’t yet catching up to demand because too few homes have been built since the end of the housing bubble and Great Recession.

FRED/Calculated Risk

This is while existing-home sales dipped in February, continuing a seesawing pattern of gains and declines over the last few months, according to the National Association of Realtors®, though they have remained above 6 million annual units. The last time sales reached 6 million annual units was during the housing bubble 2004-2007 when sales were as high as 7 million housing units, per Calculated Risk’s graph.

Total existing-home sales,1, completed transactions that include single-family homes, townhomes, condominiums and co-ops, sank 7.2% from January to a seasonally adjusted annual rate of 6.02 million in February. Year-over-year, sales decreased 2.4% (6.17 million in February 2021).

"Housing affordability continues to be a major challenge, as buyers are getting a double whammy: rising mortgage rates and sustained price increases," said Lawrence Yun, NAR's chief economist. "Some who had previously qualified at a 3% mortgage rate are no longer able to buy at the 4% rate.”

Home builders are working hard to catch up to demand, and now have the most homes under construction since 1973, according to Bill McBride’s Calculated Risk Newsletter.

McBride asserts with 4% 30-year mortgage rates, “…we will likely see a slowdown in both new and existing home sales (based on previous periods of rising rates). It also seems likely house price growth will slow. However, the impact on inventory is unclear.

So rising interest rates will slow down this red-hot housing market, but until inventories return to a more normal 4-6 months of supply (from the current 1.7 months), inventories won’t catch up to the demand for housing and significantly moderate prices.

Harlan Green © 2021

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