Too-high prices destroy demand. Everyone knows that. Lower prices would bring out demand.
By Wolf Richter for WOLF STREET.
The extent to which demand for existing homes has collapsed and remains collapsed is astounding, but ultimately not surprising: Demand plunged in 2022 when mortgage rates soared, and plunged a lot further in 2023 as mortgage rates continued to rise to almost 8% by October 2023. But then as mortgage rates dropped starting in November, and kept dropping in 2024, demand stayed at these collapsed levels through September, despite mortgage rates having dropped to near 6%. And now that mortgage rates have bounced off the September lows since the rate cut, demand has collapsed further, even as inventories have been rising all year.
And everyone knows why: Prices are too high. That prices are too high, after the crazy spike, can bee seen in the charts of our Most Splendid Housing Bubbles in America. And people have gone on Buyers’ Strike. We’ve been saying that for a long time, and Fannie Mae found in a survey just before the rate cut that lower prices are exactly what buyers are waiting for – lower prices, lower mortgage rates, and higher wages. In other words, people are still on Buyers’ Strike, and they’re staying on strike.
And it was confirmed today by the plunge in weekly applications for mortgages to purchase a home – a plunge from already historically low levels – according to data from the Mortgage Bankers Association. The Purchase Mortgage Applications Index has stayed in the same historically low range since the beginning of 2023:
Fannie Mae economists, in their forecast for the remainder of 2024 said, “we expect affordability to remain the primary constraint on housing activity for the foreseeable future, and we now think full-year 2024 will produce the fewest existing home sales since 1995.” So we’re not alone.
Sales of existing single-family houses, townhouses, condos, and co-ops have plunged by about 26% from 2018 and 2019, and by about 34% from 2021, according to data from the National Association of Realtors. In 2023, they fell to 4.09 million homes, the lowest since 1995. In 2024 so far through August, sales are tracking 2.5% below 2023. And if that decline continues, sales will drop to about 4.0 million homes.
This demand destruction is worse than it was during the depth of the Financial Crisis as millions of people lost their jobs and mortgages blew up, and 2024 is the second year in a row, all because prices are too high. High prices destroy demand. Everyone knows that (light-blue column = our estimate for 2024, historical data from YCharts).
Mortgage rates had dropped to 6.13% just before the rate cut on September 18, a two-year low, according to Mortgage Bankers Association data. But 11 days after the Fed cut its policy rates by 50 basis points, all data-heck broke loose. Large upward revisions of job growth, personal income, the savings rate, economic growth, and PPI inflation, topped off by CPI inflation rising for the third month in a row, changed the entire scenario, rekindling inflation fears. The bond market reacted to it and longer-term yields surged, as did mortgage rates.
The average 30-year fixed mortgage rate jumped to 6.52% in the latest week, according to the Mortgage Bankers Association today. It’s quite a U-turn:
As mortgage rates dropped from November 2023 through mid-September 2024, home sales have continued to wobble along historic lows. Now that mortgage rates have jumped, home sales will likely fizzle further for the rest of the year.
During the time that mortgage rates dropped, while home sales wobbled along historic lows, applications to refinance existing mortgages rose from the ashes and more than tripled by mid-September, from near-nothing levels late last year, to the highest activity level since April 2022, which was when the rate hikes started.
But over the past two weeks, as mortgage rates spiked, the Refinance Mortgage Applications index re-plunged, according to the MBA today. Here is the detailed view:
On this longer-view chart, which includes the historic spike in refi applications during the 3%-mortgage era, we can see how refi applications (red) move inversely with mortgage rates (blue).
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Just as a reminder about inventories of existing and new homes, gleaned from prior articles here:
Active listings of existing homes surged 34% year-over-year, to 940,980 listings, the highest since April 2020, and the highest for any September since 2019.
Of the biggest 50 metros, active listings exploded in the San Diego MSA (+77% year-over-year), followed by Tampa (+74%), Orlando (+69%), Seattle (+68%), and Miami (+68%).
The red line = 2024, purple line with black dots = 2019. The four lines below the 2024 line are the years 2020, 2021, 2022, and 2023 (data via Realtor.com).
Supply of existing homes rose to 4.2 months at the current rate of sales, up 27% from a year ago, and the highest for any August since 2018.
Inventory of new completed houses jumped by 46% year-over-year, and by over 200% since mid-2021, to 104,000 houses in August, the highest since November 2009, according to Census Bureau data today.
About half of all new houses sold are in various stages of construction currently, many of them in the early stages of construction or even before construction begins, and buyers have to wait for (sometimes many) months before they can move in. Finished houses are essentially move-in ready. But builders have tied up a lot of capital in them, and they have to be sold quickly. Inventory of completed houses encourages builders to make deals.
Inventories of new houses at all stages of construction – from not yet started to completed – rose to 470,000 houses, right up there with August-October 2022, and they’re all the highest since 2008. Supply rose to 8.2 months.
The good old days when we the housing bears thought even 2018 and 2019 prices in certain markets like SoCal and NorCal were quite bubbly…boy do we look stupid now…if that was bubbly, this current tug of war and insane out of this universe prices is whole other thing…hopefully 10 years from now, we don’t look back at now and go, boy were we wrong when we thought home prices then were high..
In a way it will be a major victory if prices goes back down to 2019 level and will probably take some kind of Armageddon event to get us there but then you realize it’s kind of a small concession since price were high back..
Yeah, just need another $5T stimulus like we got in early 2020 right after some felt 2019 prices were bubbly.
Prices can’t come down to 2019 levels since the Fed still holds more MBS than it did in back then and their balance sheet is still $2T away from where it was, too.
Wrong… prices can come down if enough people need to sell there homes. Fed has nothing to do with it.
Really looking forward to this happening so I can think about buying something. Hopefully next five years🤞
Thanks WR for these reports.
I hope home prices becomes sane again for working family to afford one.
I guess it’d be a long haul grinding process taking many years to bottom out.
Home sales, rising inventory, stagnant at peak employment. What would happen when the recessing hits….
Yes. Thanks, again, Wolf, for raising people’s (and my) consciousness about these facts. We have a tendency to believe things based on a few anecdotes that we hear or see. Stories.
You are doing a great service for everyone who reads these articles. Even for those who only read part of the GDFAs.
Mr. Wolf: CNBC has a article: “How a rare type of mortgage is landing homebuyers a 3% rate,” Oct. 15, 2024. The CNBC article discusses “assumable mortgages.” Shades of 1979 and very early 1980s treasure hunts, but at only a 6-7% mortgage environment, not the 13-14% of the old days. If this inflation gets out of hand, that it certainly will, it would be a spectacle not seen since ancient Rome was burned.
1. The key in the headline is “a rare type of mortgage.” You can forget the rest. There are not enough numbers out there to make any difference.
2. The buyer would have to come up with a large amount of cash up front because they don’t just assume the payments; they have to pay in cash the difference between the remaining mortgage debt and the purchase price of the house. So the buyers that would really need a 3% assumable mortgage to be able to buy the home cannot afford it because they don’t have enough cash to pay for the seller’s home equity up front. This is a nice benefit for the already wealthy though who could easily afford a 6% mortgage.
One tiny point of anec-data: Property in Sonoma County (1949 “modern farmhouse” on just under an acre)
-Sold in 2019 for $735k
-Listed 3/2021 for $899k, sold quickly for $1.05M. (Maybe Bay Area people who could WFH?)
-Listed in 8/2024 for $1.05M, just closed for $915k.
Somebody lost a bunch of money. Maybe it’s in a fire area needing FAIR insurance ($$$$)?
If enough of these pandemic impulse purchases come on the market, there’s hope for those of us who actually want to live in semi-rural areas.
You might have something there about the “fire area”. Natural events have affected most of the areas Wolf had listed as:
“Of the biggest 50 metros, active listings exploded in the San Diego MSA (+77% year-over-year), followed by Tampa (+74%), Orlando (+69%), Seattle (+68%), and Miami (+68%).” are in nasty weather zones.
Yet Mcgumphrey and his wife Sue Mcgumphrey say “phawww T’all thet” “Mih Haass es Wurt a fertune”
Offer them less than asking and they may sic the dog on you.
Or they may accept, because they’re bleeding money, especially if the house is vacant and they’re headed into the slowest selling period for about 5 months.
I fear interest rates will rise due to inflation, further hurting the housing market’s affordability.