Key Points: – Existing home sales dropped 5.4% in June, indicating a market slowdown – Housing inventory increased by 23.4% year-over-year, yet prices continue to rise – Market shows signs of transitioning from a seller’s to a buyer’s market
The U.S. housing market is showing signs of a significant shift, as June’s home sales data points to a cooling market and a potential transition favoring buyers. According to the latest report from the National Association of Realtors (NAR), sales of previously owned homes declined by 5.4% in June compared to May, reaching an annualized rate of 3.89 million units. This marks the slowest sales pace since December and represents a 5.4% decrease from June of the previous year.
The slowdown in sales can be largely attributed to the spike in mortgage rates, which surpassed 7% in April and May. Although rates have slightly retreated to the high 6% range, the impact on buyer behavior is evident. Lawrence Yun, chief economist for the NAR, noted, “We’re seeing a slow shift from a seller’s market to a buyer’s market.”
One of the most significant changes in the market is the substantial increase in housing inventory. The number of available homes jumped 23.4% year-over-year to 1.32 million units at the end of June. While this represents a considerable improvement from the record lows seen recently, it still only amounts to a 4.1-month supply, falling short of the six-month supply typically considered balanced between buyers and sellers.
The surge in inventory is partly due to homes remaining on the market for longer periods. The average time a home spent on the market increased to 22 days, up from 18 days a year ago. This extended selling time, coupled with buyers’ increasing insistence on home inspections and appraisals, further indicates a shift in market dynamics.
Interestingly, despite the increased supply and slower sales, home prices continue to climb. The median price of an existing home sold in June reached $426,900, marking a 4.1% increase year-over-year and setting an all-time high for the second consecutive month. However, this price growth is not uniform across all segments of the market.
The higher end of the market, particularly homes priced over $1 million, was the only category experiencing sales gains compared to the previous year. In contrast, the most significant drop in sales occurred in the $250,000 and lower range. This disparity highlights the ongoing affordability challenges in the housing market, especially for first-time buyers and those seeking lower-priced homes.
The changing market conditions are also influencing buyer behavior. Cash purchases increased to 28% of sales, up from 26% a year ago, while investor activity slightly decreased to 16% of sales from 18% the previous year. These trends suggest that well-funded buyers are still active in the market, potentially taking advantage of the increased inventory and longer selling times.
Looking ahead, the market’s trajectory remains uncertain. Yun suggests that if inventory continues to increase, one of two scenarios could unfold: either home sales will rise, or prices may start to decrease if demand doesn’t keep pace with supply. The influx of smaller and lower-priced listings, as noted by Danielle Hale, chief economist for Realtor.com, could help moderate overall price growth and potentially improve affordability for some buyers.
As the housing market navigates this transition, both buyers and sellers will need to adjust their strategies. Buyers may find more options and negotiating power, while sellers may need to be more flexible on pricing and terms. The coming months will be crucial in determining whether this shift towards a buyer’s market solidifies or if other factors, such as potential changes in mortgage rates or economic conditions, alter the market’s trajectory once again.
Mortgage rates fell to their lowest level in seven months this past week, providing a glimmer of hope for homebuyers who have been sidelined by high borrowing costs.
The average rate on a 30-year fixed mortgage dropped to 6.60% according to Freddie Mac, down from a recent peak of nearly 8% in October 2023. While still high historically, the retreat back below 7% could draw more prospective homebuyers back into the market.
The dip in rates comes as the housing market is showing early signs of a potential turnaround after a dismal 2023. Home sales plunged nearly 18% last year as surging mortgage rates and stubbornly high prices made purchases unaffordable for many.
But January has seen some positive signals emerge. More homes are coming up for sale as sellers who waited out 2023 finally list their properties. Real estate brokerage Redfin reported a 9% annual increase in inventory in January, the first year-over-year gain since 2019.
At the same time, buyer demand is also perking back up with the improvement in affordability. Mortgage applications jumped 10% last week compared to the prior week according to the Mortgage Bankers Association. While purchase apps remain below year-ago levels, the turnaround suggests buyers are returning.
“If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months,” said Joel Kan, MBA’s Vice President of economic and industry forecasting.
The increase in supply and demand has some experts predicting the market may be primed for a rebound in the spring home shopping season. But whether the inventory can satisfy purchaser interest remains uncertain.
“As purchase demand continues to thaw, it will put more pressure on already depleted inventory for sale,” noted Freddie Mac Chief Economist Sam Khater.
Homebuilders have pulled back sharply on new construction as sales slowed over the past year. And many current owners are still hesitant to sell with mortgage rates on their existing homes likely much lower than what they could get today. That leaves the total number of homes available for sale still historically lean.
Nonetheless, agents are reporting more bidding wars again for the limited inventory available in some markets. While not at the frenzied pace of 2022, competition for the right homes is heating up. Experts say interested buyers may want to start making offers now before the selection gets picked over.
“I’m advising house hunters to start making offers now because the market feels pretty balanced,” said Heather Mahmood-Corley, a Redfin agent. “With activity picking up, I think prices will rise and bidding wars will become more common.”
The driver of the downturn in rates since late last year has been an overall cooling of inflation pressures. The Federal Reserve pushed the 30-year fixed mortgage above 7% for the first time in over 20 years with its aggressive interest rate hikes aimed at taming inflation.
But evidence is mounting that the Fed’s policy actions are having the desired effect. Consumer price increases have steadily moderated from 40-year highs last summer. The slower inflation has allowed the central bank to reduce the size of its rate hikes.
Markets now expect the Fed to lift its benchmark rate 0.25 percentage points at its next meeting, a smaller move compared to the 0.50 and 0.75 point hikes seen last year. The slower pace of increases has taken pressure off mortgage rates.
However, the Fed reiterated it plans to keep rates elevated for some time to ensure inflation continues easing. Most experts do not foresee the central bank cutting interest rates until 2024 at the earliest. That means mortgage rates likely won’t fall back to the ultra-low levels seen during the pandemic for years.
But for homebuyers who can manage the higher rates, the recent pullback provides some savings on monthly payments. On a $300,000 loan, the current average 30-year rate would mean about $140 less in the monthly mortgage bill versus the fall peak above 8%.
While housing affordability remains strained by historical standards, some buyers are jumping in now before rates potentially move higher again. People relocating or needing more space are finding ways to cope with the increased costs.
With some forecasts calling for home prices to edge lower in 2024, this year could provide an opportunity for buyers to get in after sitting out 2023’s rate surge. It may be a narrow window however. If demand accelerates faster than supply, the competition and price gains could return quickly.
Pending home sales in the U.S. unexpectedly plunged in October to their lowest levels since record-keeping began over two decades ago, even below readings seen during the housing crisis in 2008.
The National Association of Realtors (NAR) reported Thursday that its index of pending sales contracts signed on existing homes retreated 1.5% from September. On an annual basis, signings were a staggering 8.5% lower than the same month last year.
October’s reading marks a continuation of the housing market’s steep slide over the past year from blistering pandemic-era sales levels as mortgage rates rocket higher in the most dramatic housing finance shake-up in decades.
“Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied,” said NAR Chief Economist Lawrence Yun.
Spike in Mortgage Rates Strangles Demand
The October pending home sales data reflects buyer activity when popular 30-year fixed mortgage rates shot up above 8% in mid-October before settling back around 7% in more recent weeks.
Skyrocketing borrowing costs over the past year have rapidly depleted home shoppers’ budgets and purchasing power, squeezing huge numbers of Americans out of the market entirely and forcing others to downgrade to lower price points.
With the average rate on a 30-year fixed loan more than double year-ago levels despite the recent retreat, still-high financing costs in tandem with stubbornly elevated home prices continue dampening affordability and sales.
All U.S. regions saw contract signings decline on a monthly basis in October except the Northeast. The Western market, where homes are typically the nation’s most expensive, recorded the largest monthly drop.
Pending transactions fell across all price tiers below $500,000 while rising for homes above that threshold. The shift partly reflects moderately improving supply conditions on the high end, even as demand rapidly recedes at lower price points.
Home Prices Still Climbing for Now
Even against shrinking demand, exceedingly tight inventories of homes listed for sale have so far prevented any meaningful cooling in the torrid home price appreciation that’s stretched affordability near the breaking point for many buyers.
The median existing home sales price rose 6.6% on the year in October to $379,100. While marking a slowdown from mid-2021, when prices were soaring 20% annually, it still represents an acceleration over the 5.7% rate seen last October.
With few homes hitting the market, bidding wars continue breaking out for even modest starter homes in many areas. In such seller-favorable conditions, a plunge in overall sales does little to crimp further rapid home value growth.
Leading indicators suggest home prices likely still have further to climb before lackluster sales and eroding affordability force more substantive cooling. But shifts in home values and sales usually lag moves in rates and mortgage activity by several months.
“The significant decline in pending sales suggests…further weakness in closed existing home sales in upcoming months,” said Swiss bank UBS economist Jonathan Woloshin.
With mortgage activity plunging to a quarter-century low, actual completed sales are widely expected to continue deteriorating into early next year or beyond as the pipe of signed deals still working through the market keeps drying up.
Path Ahead for Housing Market
Most economists expect home sales will likely continue slumping over the next six months or so until lower financing costs combined with a slow improving inventory offer some stability.
“We think housing activity has little prospect of bottoming out until spring 2024, at the earliest,” said Nancy Vanden Houten of Oxford Economics. She projects existing home sales will fall nearly 25% in 2024 from current-year levels.
Other analysts say still-strong demographics and a solid job market should prevent an all-out housing collapse, but that robust spring and summer recovery rallies like those seen earlier this century are unlikely in coming years.
Instead, as mortgage rates settle somewhere above 6% and homes trickle back on the market, sales activity should slowly stabilize around 10-15% below 2018-2019 levels through 2024 and beyond – marking a ‘new normal’ after ultra-hot pandemic conditions.
“I expect mortgage rates to moderate…helping home sales firm up a bit, but still remain below pre-pandemic activity,” said Yun. With fresh records signaling just how devastating this year’s rate spike proved for buyers, Yun expects the spring thaw in housing demand could come slower next year than markets anticipate.
Without the Fed’s easy money, demand for housing would collapse, according to Ryan McMaken. McMaken, who authored the below article, is a former housing economist for the State of Colorado. He believes once the Fed pivots back to forcing down interest rates and again buying mortgage-backed securities (MBS), housing prices that have recently dipped, will again continue their march upward. He makes the case here that the housing market, without Fed support, faces difficult headwinds. – Paul Hoffman, Managing Editor, Channelchek
Last Friday, residential real estate brokerage firm Redfin released new data on home prices, showing that prices fell 0.6 percent in February, year over year. According to Redfin’s numbers, this was the first time that home prices actually fell since 2012. The year-over-year drop was pulled down by especially large declines in five markets: Austin (-11%), San Jose, California (-10.9%), Oakland (-10.4%), Sacramento (-7.7%), and Phoenix (-7.3%). According to Redfin, the typical monthly mortgage payment is now at a record high of $2,520.
The Redfin numbers come a few days before new numbers from the Case-Shiller home price index showing further slowing in home prices growth since late last year. The market’s expectation for December’s 20-city index had been -0.5 percent, month over month, and 5.8 percent, year over year. But the numbers came in worse (from the seller’s perspective) than was hoped. For December—the most recent monthly data available—the index ended up showing a month-over-month drop of -1.5 percent (seasonally adjusted), and a year-over-year gain of 4.6 percent (not seasonally adjusted).
By most accounts, the rapidly-slowing market faces headwinds thanks to rising interest rates, including the standard 30-year fixed mortgage, which is now back up over 6 percent. This puts homeownership out of reach for many first-time buyers and is also a big disincentive for current owners to “move-up” into higher-priced houses since any new home would come with a much higher mortgage rate than was available a year ago.
Not surprisingly, demand for new mortgages has plummeted. CNBC reported last week:
“Mortgage applications to purchase a home dropped 6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 44% lower than the same week one year ago and is now sitting at a 28-year low.”
So, sales have fallen and, at least according to Redfin, prices are falling too. This is what we should expect to see in any environment where the real estate market is not being incessantly fueled by easy money from the central bank. After all, easy money for real estate markets had been the main story since 2009. In recent months, however, the Fed has allowed interest rates to rise while pausing efforts to add more mortgage-backed securities (MBS) to the Fed’s portfolio. Without those key supports from policymakers, the real estate market simply lacks the market demand that is necessary to sustain rapid growth. Contrary to what countless mortgage brokers and real estate agents tell themselves and each other, there is precious little capitalism in real estate markets. It is a market that is thoroughly addicted to, and dependent on, continued stimulus and subsidization from the central bank.
Without the central bank propping up MBS demand in the secondary market, primary-market mortgage lenders have fewer dollars to throw around. That means higher interest rates and fewer eligible buyers. Similarly, by setting a higher target rate for the federal funds rate that banks must pay to manage liquidity, markets face less monetary growth in general. That comes with a lessening overall demand that—in the short term, at least—drives up incomes for both current and potential homebuyers.
Even worse, continued nominal income growth that does exist is not keeping up with price inflation. The result has been 22 months in a row of negative real wage growth, and that will translate to falling demand.
This close connection between easy money and demand for homes can be seen when we compare growth in the Case-Shiller index to growth in the money supply. This has been especially the case since 2009. As the graph shows, once money-supply growth begins to slow, a similar change occurs in home prices one year later.
As money-supply growth rapidly slowed after January 2021, we then saw a similar trend in home prices 12 months later, with a rapid deceleration in the Case-Shiller index. Remarkably, in November of last year, money-supply growth turned negative for the first time since 1994. That points toward continued drops in home prices throughout this year. If Redfin’s February numbers are any indicator, we should expect price growth to turn negative in the Case-Shiller numbers this spring.
Now just imagine how much more lackluster real estate markets would be without the Fed buying up all those trillions in MBS over the past decade. It’s now been more than a decade since we had any idea what real estate prices actually would be without enormous amounts of stimulus from the Fed. The money-printing-for-mortgages scheme entered its first phase throughout 2009 and 2010, and then was almost non-stop from 2013 to 2022, topping out around $1.7 trillion in 2018. The Fed had begun to pull back on its MBS assets in 2018 and 2019, but of course reversed course in 2020 and engaged in a frenzy of new MBS buying. In that period the Fed purchased an additional $1.4 trillion in MBS. That finally ended (for now) in the fall of 2022. The Fed still holds over $2.6 trillion in MBS assets.
If we look at year-over-year changes in these MBS purchases along side Case-Shiller home prices, we again see a clear correlation:
It’s clear that once markets think the Fed may again increase its MBS purchases, home prices again surge. This close relationship should not surprise us since the volume of MBS purchases is a sizable portion of the overall market. Since 2020, the Fed’s MBS stockpile has equaled at least 20 percent of all the household mortgage debt in the United States. In early 2022, Fed-held MBS assets peaked at 24 percent of all US mortgage debt, but they still made up over 20 percent of the market as of late 2022.
Lest we think that real estate markets seem to be weathering the storm fairly well, let’s keep in mind this is all happening during a period when the unemployment rate is very low. Yes, the federal government has greatly exaggerated the amount of job growth that has occurred in the economy over the past 18 months. However, it’s also fairly clear that real estate markets are not yet seeing large numbers of unemployed workers who can’t pay their mortgages. When that does occur, we can expect an acceleration in falling home prices. For now, most mortgages are being paid, and even as real wages fall, most homeowners are cutting in places other than their mortgage payments. Once job losses do set in, all bets are off, and a wave of foreclosures will be likely. Many jobless workers won’t be able to sell quickly to avoid foreclosure either. With so few borrowers who can afford rising mortgage rates, there will be relatively few buyers. That’s when prices will really start to come down—when there is a mixture of motivated sellers and rising interest rates.
For now, though, the investor class remains relatively optimistic. Marcus Millichap CEO Hessam Nadji was on Fox Business last week flogging the now well-worn narrative that we should expect a “small recession,” but Nadji did not even entertain the idea that there might be sizable layoffs. Instead, he suggested that there is now a mere temporary softening of demand, and that will reverse itself once the Fed reverses course and embraces easy money again. In other words, the Fed will time everything perfectly, and it will be a “soft landing.”
This well captures the attitude of the “capitalists” heading the real estate industry right now. It’s all about the Fed. Without the Fed’s easy money, demand is down. Once the Fed pivots back to forcing down interest rates and buying up more MBS, well then happy times are here again. Gone is any discussion of worker productivity, savings, or other fundamentals that would drive demand in a areal capitalist market. All that matters now is a return to easy money. The real estate industry will get increasingly desperate for it. In 2023, it’s become the very foundation of their “market.”
About the Author
Ryan McMaken has a bachelors degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. He was a housing economist for the State of Colorado. Ryan is a cohost of the Radio Rothbard podcast, has appeared on Fox News and Fox Business, and has been featured in a number of national print publications including Politico, The Hill, Bloomberg, and The Washington Post.
CoreCivic is a diversified, government-solutions company with the scale and experience needed to solve tough government challenges in flexible, cost-effective ways. We provide a broad range of solutions to government partners that serve the public good through high-quality corrections and detention management, a network of residential and non-residential alternatives to incarceration to help address America’s recidivism crisis, and government real estate solutions. We are the nation’s largest owner of partnership correctional, detention and residential reentry facilities, and believe we are the largest private owner of real estate used by government agencies in the United States. We have been a flexible and dependable partner for government for nearly 40 years. Our employees are driven by a deep sense of service, high standards of professionalism and a responsibility to help government better the public good. Learn more at www.corecivic.com.
Joe Gomes, Senior Research Analyst, Noble Capital Markets, Inc.
Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
3Q22 Operating Results. CoreCivic reported revenue of $464.2 million, compared to $471.2 million in the year ago period and our estimate of $456 million. Higher expenses, related to labor costs, including hiring additional staff ahead of expected population increases, caused net income to be below our forecast. Driven by the gain on the McRae sale, reported net income was $68.3 million, or $0.58 per diluted share, versus our estimate of $72.5 million, or $0.61 per share.
La Palma Update. Ongoing expenses with the La Palma transition impacted 3Q22 but the good news is the transition should now be complete by yearend as opposed to 1Q23. With the ICE contract at La Palma expired, management believes the Company is well positioned to add additional ICE populations at its other Arizona facilities. Overall, CoreCivic is well positioned to accept additional populations, from the Federal government or state governments.
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Homeowners With Low Rates May Keep Inventories Low and Prices Stable
For many, the largest single asset they own is their home. While many investors are concerned about what rising interest rates may mean for investments in the stock market, homeowners are keenly aware that rates can directly impact home prices as most borrow to buy. The amount they can borrow is directly related to their cash flow, so the purchase price they can afford rises and falls with mortgage rates. This impacts demand and offer prices. But what does it do for the supply side of the pricing mechanism?
Rate Increases and Homes on the Market
Mortgage rates over the past year have risen from the low 3% range to the low 6% range for traditional 30-year loans. Typically the period in the rate cycle when mortgages begin to rise corresponds to a Fed tightening cycle, as it has in 2022. While rates were lower, buyers were able to afford “more house” and allowed sellers to push up asking prices – or in some cases, buyers would have had a bidding war driving up a home’s price.
As rates increase and it then costs borrowers more each month for the same price, buyers lessen. Home prices initially don’t decline as quickly as sellers would like as home sellers are stickier on the way down than they are on the way up. As with any investment, until you book your profit/loss, it’s just paper gains/losses. And homeowners don’t like to think of themselves as having “lost” thousands because their house once would have fetched more. So home buyers sit and wait, which in the past has caused inventories to increase. Eventually, there is capitulation among homeowners, and many houses hit the market with lower prices attached to them.
This has not happened yet during this rate cycle, and there is an underlying reason that may prevent it from happening. Existing homes are not entering the market as expected.
Homes for Sale are Scarce
The Wall Street Journal published an investigative piece on the real estate market and how Homeowners with low mortgage rates are stubbornly refusing to sell their homes because it would mean they’d have to borrow at much higher rates for wherever they may move.
The Journal reported that housing inventories had risen somewhat from record lows earlier in 2022. But this is primarily because they aren’t selling as quickly. The number of newly listed homes from mid-August to mid-September fell 19% from the same weeks last year. This suggests that those that may have sold to move for any reason are staying put.
The explanation for this unexpected phenomenon is that most that have purchased or refinanced their homes in the past few years have historically low mortgage rates. Imagine having 2.75% locked in for 30 years and knowing that if you purchase the home in the next town with the extra bedroom, your rate will be 6.25%. Potential sellers are opting to make do.
Homes will always enter the market regardless of dynamics. People die, change jobs, get divorced, the kids move out, etc. But, if those who have the option not to move decide to stay in larger percentages than in the past, it could keep the inventory of homes for sale below normal levels. The low supply could keep home prices elevated.
Another option someone who would like to move has is to rent. Rents have been quite high; this would serve to reduce the upward pressure on tenants. It would also keep homes from entering the market, allowing them to retain values better than might be expected with higher mortgage rates.
The scarcity of homes on the market is one of the primary reasons home prices have retained their high levels, despite seven straight months of declining sales in a period when interest rates have roughly doubled since December.
Handcuffed by Low Rates
There is a term used on Wall Street for employees that feel they can’t leave their company because they have vesting interests worth too much. For example, my friend Katherine was granted stock options from her company, the ability to exercise the options vested over a few years. At any point, if she left to take another position, or as she told me she wanted to do, raise children, she would have been leaving a huge sum of future stock or cash behind. Homeowners with mortgages near 3% when rates are near 6% have found their situation similarly handcuffs them and drives greed-based behavior.
Today Millions of Americans are locked in historically low borrowing rates. As of July 31, nearly nine of every ten first-lien mortgages had an interest rate below 5%, and more than two-thirds had a rate below 4%, according to mortgage-data firm Black Knight Inc. About 83% of those mortgages are 30-year fixed rates.
Can it Last?
Homeowners looking for more space are now more likely to add on than they had been before. For those looking to scale down, they may find that it isn’t worth it. In an analysis of four major metro areas—Atlanta, Chicago, Los Angeles, and Washington—Redfin found that homeowners with mortgage rates below 3.5% were less likely to list their homes for sale during August compared with homeowners with higher rates.
It is difficult to predict any market, and there is very little history to look back on when rates have been increased this quickly. Sam Khater, the chief economist for Freddie Mac, told the Wall Street Journal an analysis he did in 2016 of past periods of rising rates showed a decline in sales in which a buyers’ prior mortgage rate was more than 2% below their new mortgage rates. But there was no change if the difference between the rates was less than two percentage points. We are likely to retain more than a 2% margin for some time based on how low homeowners’ mortgages now are. Perhaps until many of the loans are paid off.
