I said last month the National Association of Realtor’s chief economist Lawrence Yun’s exclamation “the housing recession is over,” was because the NAR’s Pending Home Sales (i.e., homes under contract but not closed) rose for the first time in four months.
"The recovery has not taken place, but the housing recession is over," Yun had said at the time.
Yun might not be so optimistic with this month’s existing-home sales, which are down to a six-month low. And we know why. It’s not only a very small number of homes for sale, but the sudden rise in mortgage rates. We can’t blame Yun for his recent enthusiasm since longer-term fixed rates rose suddenly when the financial markets began to take seriously the possibility of accelerating economic growth rather than a recession this year.
Total existing-home sales[1] – completed transactions that include single-family homes, townhomes, condominiums and co-ops – waned 2.2% from June to a seasonally adjusted annual rate of 4.07 million in July. Year-over-year, sales slumped 16.6% (down from 4.88 million in July 2022), said the NAR.
“Two factors are driving current sales activity – inventory availability and mortgage rates,” said Yun. “Unfortunately, both have been unfavorable to buyers.”
The rest of the US economy has been recovering with the second quarter 2023 GDP advance estimate growing 2.4 percent, and the Atlanta Fed is now predicting the possibility that third quarter GDP growth could be as high as 5.8 percent.
Most economists are discounting such a possibility, but the possibility of higher growth has put the fear of higher interest rates in their calculations, and the real estate market is particularly affected by interest rate trends.
There is, however, very little inflation to fear, hence I believe bond traders are overreacting. The best inflation indexes show the retail inflation rate a little above 3 percent, down sharply from last year’s high.
Bond traders are causing the 10-year benchmark Treasury bond yield to rise that fixed mortgage rates use as an index. It is also considered to be a hedge against the possibility of higher inflation, and has risen almost 1 percent in the past few months to 4.3 percent, from its low of 0.54 percent in March 2020.
This was the reason for the sudden jump in existing-home sales to almost 7 million units annualized in 2020 (see above Calculated Risk graph). The 30-year conforming fixed rate mortgage fell as low as 3.5 percent, causing the sudden surge in housing sales.
When will the housing sales decline reverse course? Not very soon, according to Calculated Risk’s Bill McBride. “It now seems likely that in a few months existing home sales will fall below the previous cycle low of 4.00 million in January 2023,”
Some good news is that sales of new single‐family houses in July 2023 were at a seasonally adjusted annual rate of 714,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development as home builders race to add to the depleted housing stock. This is a huge increase--4.4 percent above the revised June rate of 684,000 and is 31.5 percent above the July 2022 estimate of 543,000.
It is difficult to see other than a continuing housing bottom now. The cure to the housing shortage is the realization by the Fed and bond traders that inflation has been conquered. There’s no reason for inflation to be higher than the current 3 percent, and maybe trend down to the Fed’s 2 percent target in the not-too-distant future.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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