Just ten days ago, your Lone Ranger here laid out why one should see the barely beginning downturn of the housing market in Seattle as the bellwether for a national housing market bust. Naturally a snowflake or two of criticism landed on my nose to say I knew nothing about real estate. That being the case, look at how the world has changed in so little time to catch up with me. An idea that you may have read here first is now mainstream news in every housing fact being reported across the nation and around the world.
The Seattle slump
Let’s start with Bloomberg’s article that came out two days ago since Bloomberg also now sees Seattle as being an omen for what is developing nationally:
“The U.S. Housing Market Looks Headed for Its Worst Slowdown in Years” Sellers were getting jumpy, even here in the hottest of markets. Homes that should have vanished in days were sitting on the market for weeks…. The U.S. housing market — particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas — appears to be headed for the broadest slowdown in years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch.
That, of course, has been my own argument as to why the housing market would resume its collapse this summer. (As regular readers will recall, I predicted last summer that a collapse that had begun would be delayed due to all the hurricanes and wildfires, which destroyed over half a million houses. Subsequently, I showed how the housing market ramped up right after that season of storms for about three months and then began to decline again, and I said the decline would become a collapse by the end of this summer. Now here we are already seeing it rapidly build.)
With incomes certain to remain flat (as they did) and mortgage rates certain to rise due to the Federal Reserve’s quantitative tightening (as they did), predicting a housing-market collapse for this summer seemed as easy as it was in 2007 to me. Yet, almost no one was seeing it … until now.
“This could be the very beginning of a turning point,” said Robert Shiller, a Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles…. A slew of figures released this week gives ample evidence of at least a cooling. Existing-home sales dropped in June for a third straight month. Purchases of new homes are at their slowest pace in eight months. Inventory, which plunged for years, has begun to grow again as buyers move to the sidelines, sapping the fuel for surging home values. Prices for existing homes climbed 6.4 percent in May, the smallest year-over-year gain since early 2017, and have gained the least over three months since 2012….
So, if you wouldn’t take it from me, there is Bloomberg and even Robert Shiller now saying this looks like the turning point in the housing market. But let’s not stop there because the media abounded with stories about a turn in housing since I wrote on the subject.
As goes Seattle so goes the nation
Seattle is not the only bellwether now in play. California is another one of the nation’s strongest real-estate markets:
“Southern California home sales crash in warning sign to nation” Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped by 11.8 percent year over year…. Sales fell 1.1 percent compared with May, but the average change from May to June, going back to 1988, is a 6 percent gain. The weakness was especially apparent in sales of newly built homes, which were 47 percent below the June average…. Sales below $500,000 dropped 21 percent on a year-over-year basis, while deals of $500,000 or more fell about 3 percent…. In the past, California, one of the largest housing markets in the nation, has been a predictor for the rest of the country. Home prices have been rising everywhere, amid a critical housing shortage. Prices usually lag sales by several months, and sales are beginning to crumble, even as more inventory comes on the market.
The decline really is all across the nation at this point:
Last month’s sales slowdown … applied to all six of the region’s counties and across most of the major price categories.
“Weak Housing Market Could Trigger Retail-Spending Pullback” If there is any sector that is susceptible to getting hurt by the actions of the Fed and the rise in materials costs it is the housing market. We saw that it in the sales data quite clearly this week. Previously, it was reported that existing home demand eased in June and today the data showed that new home sales also tanked during the month…. The only region where there was strength was the Northeast, similar to the existing home report. For new homes, though, the other three regions posted declines.
“New-Home Sales Drop 5.3 Percent to 8-Month Low as Prices Fall” New home sales in the South, which accounts for the bulk of transactions, declined 7.7 percent in June. Sales fell 5.2 percent in the West and tumbled 13.4 percent in the Midwest. They surged 36.8 percent in the Northeast to a 10-1/2-year high, however.
Numerous articles saying the same thing sprang up about the housing market’s decline in ten days that shook the world since I first wrote about this. Here are a few more just to back that statement up:
This time, the bubble that is starting to deflate is international, not just national:
“Home prices are plateauing,” said Ed Stansfield, chief property economist at Capital Economics Ltd. in London. (Bloomberg again)
“Mortgage Prison: Sydney Home Prices Suffer Largest Annual Decline Since 2008” Home prices in Sydney and Melbourne are back to 2016 levels. That is a tiny down payment as to what is coming — the first annual drop in national property prices in six years…. Sydney and Melbourne … represent about two thirds of Australia’s housing market by value. Sydney house prices fell by 4.5 per cent in the 12 months to the end of June for their largest annual drop since 2008…. Australia’s building commencements, fueled by investor apartment construction, look like heading from boom to bust.
Canada, too, is finally seeing a downturn in housing. That one is a little harder to gauge as a crisis for the simple reason that it is intentional … at least in Vancouver where it is most pronounced. Vancouver decided to place a high tax on international investors who do not live in the homes they buy in order to drive out Chinese investors.
The price plunge
While my last article was predominantly about the decline in building permits (since they are forward looking), now we have statistics showing that prices (the last aspect to fall in a housing collapse) are beginning to drop all across the nation.
“New-Home Sales Drop 5.3 Percent to 8-Month Low as Prices Fall” “The housing market is flattening, and may have peaked for this expansion,” said Robert Frick…. The housing market has underperformed the economy this year. According to a Reuters survey of economists…. The median new house price fell 4.2 percent to $302,100 in June from a year earlier.
“New Home Prices Drop Sharply For 2nd Month” It’s not any stretch to write that the real estate market has hit a soft patch. Resales are down if only a little as are construction indications (permits and starts)…. When last month prices were reported to have dropped by about 4% year-over-year in May 2018, that was one thing. Even though it was by far the largest decline since 2012, a single monthly estimate isn’t enough to even write something about it. For that -4% to … [be] matched by the same number in June 2018, that can get your attention…. Two months of a clear break reduces the chances of it being strictly a statistical issue.
Yes, it should be getting your attention, especially when it is now harmonizing with a chorus of facts that are building in housing.
Excluding the effects in the aftermath of Harvey and Irma, sales have been flat or flatish (depending upon your perspective) for almost a year…. Maybe that’s just slightly higher mortgage rates catching up with prospective home buyers. Or, perhaps home prices though growing at a historical pace still rose too quickly for limited wage growth (despite so many anecdotal labor shortages).
Well, of course, but that is just math. That is exactly what has to happen when you know wages aren’t rising and you know interest certainly will rise. That is what made this crisis so easy to predict in the first place, though many still don’t see it as crisis, even as it is unfolding. Here is why it is much bigger than just housing:
Taking stock of the falling housing market
It is not just tech stocks that are heading south. The stock market, at least, seems to have finally woken up to the fact that housing is falling. The stocks of housing construction companies are falling.
“Forget Tech: Home Suppliers See Biggest 5-Day Rout Since February” While Wall Street gets jittery at tech stocks’ biggest loss in a month amid a rout in Facebook, homebuilding suppliers are quietly falling at a pace unseen since the market’s February rout. The S&P Homebuilding Index fell 0.1 percent on Thursday, widening its five-day plunge to 7.8 percent. This earnings week is turning from bad to worse for home appliance and construction companies.
And that is where a downturn in housing is so critical to the entire economy. All the many products, from blinds to furniture to all the different kinds of construction supplies, that go into building a house go down when housing goes down. And that means the entire industrial and transportation section of the stock market goes down as well as retailers like Home Depot and Lowes. The cascade through the stock market and through the overall economy is huge if housing goes backward.
First, Whirlpool Corp. tumbled 15 percent on Tuesday after disappointing second-quarter results. The next day, Owens Corning plunged as much as 14 percent after second-quarter earnings missed estimates. And on Thursday, flooring company Mohawk Industries Inc. lost 16 percent after reporting an EPS miss.
And so it goes. Again the two main drivers listed are higher mortgage rates and price inflation. Also added are increased material costs due to tariffs. Home builders have particularly been complaining about rising lumber costs since Trump imposed tariffs on Canadian lumber in April of 2017 (the first round of tariffs put in place). Owens Corning on the other hand blamed “storm-related demand this year,” which is really just to reaffirm statements I’ve made since last summer when the housing market started to collapse — that it was hugely propped up by all the storm destruction that created a temporary housing REconstruction boom.
This is one more huge headwind for the stock market, but it is also another huge headwind that will be forcing the Retail Apocalypse.
“Weak Housing Market Could Trigger Retail-Spending Pullback” Both new and existing home sales drive demand for a variety of housing-related products, such as furniture, kitchen products, paint or garden supplies. A softening in the housing market will slow, with a lag, retail purchases of those types of products…. We need housing to be strong if growth above 3% is to be sustained. While a housing market slowdown should give the Fed some concern, the sector might have to tank before the members would seriously consider slowing the rate normalization process.
So, this is a big deal — a really big deal. As goes housing, so goes the entire economy, which has been rebuilt on housing because sales in almost everything drop when housing drops.
Rising mortgage interest leads the way down
“Average US Mortgage Rates Edge Higher as 30-Year Hits 4.54 Percent” Rates are back up to their highest since June…. Long-term loan rates have been running at their highest levels in seven years…. Steadily rising home prices combined with higher mortgage rates “appear to be giving more prospective buyers pause,” said Freddie Mac’s chief economist Sam Khater.
How could the nation not see this coming? It’s a given unless economic denial blinds you. If people would take their heads out of the sand, they’d realize that predictions like this are simple math. The Fed originally did its quantitative easing in order to bring mortgage rates down, and that worked, so how could the exact opposite move with quantitative tightening not have an equal-and-opposite effect on mortgage interest?
The Fed’s Great Unwind is here, and this is the effect I have assured people will be happening as the unwind gains momentum. Just as the math for what will happen with mortgage rates is simple to predict, so the math of what will happen for demand is simple. Flat wages plus higher interest have to mean fewer people qualifying for loans. Yet, the majority refuse to believe that, too, basic as it is … because they simply don’t want to believe it.
This is summertime — peak real-estate season — so if sales are tanking now, a housing collapse is as good as in the bag because sales certainly are not going to get better as the Fed continues to raise its interest targets and carry out its quantitative diseasing, even as the usual winter real-estate slump sets in. Those who can’t see that are simply not seeing what they don’t want to see.