Calculated Risk

By Bill McBride

Purchasing Same House, Monthly Payments Up 44% Year-over-year

New Listings at Record Low for February

Here is a graph of new listing from Realtor.com’s February 2023 Monthly Housing Market Trends Report showing new listings were down about 16% year-over-year in February. New listings are at a record low for February, the year-over-year decline was larger in February than in January. From Realtor.com:

In February, the number of homes newly-listed for sale declined by 15.9% compared to the same time last year. This is a higher rate of decline than last month’s 10.4% decrease but it’s still an improvement from the declines seen in November and December. However, new listings remain 27.0% below pre-pandemic 2017 to 2019 levels.

And the local markets I track that have reported so far, also show new listings were down more in February than in January.

For these areas, new listings were down 16.2% YoY. … Last month, new listings in these markets were down 7.4% YoY. This is a larger YoY decline in new listings, and similar to the YoY declines in October, November and December.

Impact on Active Inventory

The following graph shows the seasonal pattern for active single-family inventory since 2015 from Altos Research. The red line is for 2023.  The black line is for 2019.

Single-family active existing home inventory was up 66.8% compared to the same week in 2022, and down 49.5% compared to the first week in 2019.  Inventory is still historically low. A key will be when inventory starts increasing in 2023 – so far inventory has declined about 16.0% over the first ten weeks of 2023.

For new homes, there are 5.0 months of homes under construction (blue line below) – well above the normal level. This elevated level of homes under construction is due to supply chain constraints. There are 1.2 months of completed homes for sale (red). This is close to the normal level.

It is likely we will see a sharp increase in completed inventory over the next several months – and that will put pressure on new home prices. It appears cancellations are now falling for new home builders (cancellations impact the New Home sales report from the Census Bureau).

And for housing starts there are a near record 1.70 million units under construction.

Red is single family units. Currently there are 752 thousand single family units (red) under construction (SA). This is 76 thousand below the recent peak in April and May. Single family units under construction have peaked since single family starts are now declining. Blue is for 2+ units. Currently there are 948 thousand multi-family units under construction.  This is the highest level since November 1973!

30-Year Mortgage Rates Have Been Volatile

The following graph from MortgageNewsDaily.com shows mortgage rates since January 1, 2020. 30-year mortgage rates were at 6.75% on March 14th, up from 6.0% in early February, and down from the recent high of over 7% – and still up sharply year-over-year.

A year ago, the payment on a $500,000 house, with a 20% down payment and 3.76% 30-year mortgage rates, would be around $1,855 for principal and interest. The monthly payment for the same house, with house prices up 3% YoY and mortgage rates at 6.75%, would be $2,672 – an increase of 44%! Monthly payments are still up sharply year-over-year.

There are always some people that need to sell; death, divorce, moving for employment are a few reasons. However, homeowners with a low mortgage rate will be reluctant to sell, and then buy a new home, when their monthly payment will be much higher for the new home. The sharp increase in mortgage rates is probably the key reason new listings have declined sharply year-over-year.

This is very different from the housing bust, when many homeowners were forced to sell as their teaser rates expired and they could not afford the fully amortized mortgage payment. The current situation is similar to the 1980 period, when rates increased quickly.

House Prices

Reported YoY house price growth is still positive, but the Case-Shiller National Index slowed to 5.8% YoY in December.

The MoM decrease in the seasonally adjusted Case-Shiller National Index was at -0.35%. This was the sixth consecutive MoM decrease, and a slightly larger decrease than in November.

Other measures of house prices indicated further declines in January. The NAR reported median prices were up only 1.3% YoY in January. Black Knight reported prices were up 3.4% YoY, and Freddie Mac reported house prices were up 2.4% YoY in January. Here is a comparison of year-over-year change in the FMHPI, median house prices from the NAR, and the Case-Shiller National index.

The FMHPI and the NAR median prices appear to be leading indicators for Case-Shiller, and based on the recent trend, the FMHPI will be negative year-over-year in March (reported at the end of April) – and Case-Shiller will follow soon after.

I’m now forecasting a 10%+ decline in nominal house prices, see House Prices: 7 Years in Purgatory.

Sales

We have seen declines in both new and existing home sales due to higher mortgage rates. The NAR reported sales in January were at a “seasonally adjusted annual rate of 4.00 million in January. Year-over-year, sales retreated 36.9% (down from 6.34 million in January 2022).”

The early local market reports suggest a smaller year-over-year decline in closed sales in February. It is possible that existing home sales, seasonally adjusted, bottomed in December and January. But a bottom in existing home sales doesn’t mean other measures are near a bottom. There are usually two bottoms for housing (see: Has Housing “Bottomed”?)

[T]here will be two bottoms for housing: one for activity and the other for prices. Existing home sales may have already bottomed, but we will see further declines in residential investment. Prices – especially in real terms – will be under pressure for some time.

And the Census Bureau reported “Sales of new single‐family houses in January 2023 were at a seasonally adjusted annual rate of 670,000”, down 19.4% YoY from January 2022.

Rents Continue to Soften

Rents are declining, and as the pace of household formation slows, and more supply comes on the market we will likely see further rent declines.

Conclusions

We have seen a significant year-over-year decline in new and existing home sales. We are just starting to see the impact on house prices, even though new listings are at a record low. Monthly mortgage payments are up sharply year-over-year for purchasing the same home.

Existing home sales will rebound a little in February but will still be at a low level. Housing starts will probably show further declines – especially multi-family – and still a near record number of housing units under construction.