For those who have been focusing on corporate earnings, the stock market and the global economy, a more ominous - if under-reported - flashpoint has emerged in recent days after some scary housing market numbers were published over the past week, or as Robert Shiller told Bloomberg, "This could be the very beginning of a turning point."
The housing market is showing signs of a downward slide after existing-home sales were down in June, sales hit their slowest pace in eight months, and mortgage rates are on the rise, causing usually restive buyers to stay patiently on the the sidelines.
In reporting on the worrisome data released this week, Bloomberg notes that "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," due to a trend of buyers "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."
Meanwhile, according to the latest Attom data, U.S. median home price appreciation decelerated in Q2 of 2018 to its slowest pace in two years. Here are some key indicators that we are indeed witnessing the start of a slowdown, published this week:
- 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, according to the Federal Housing Finance Agency.
- Shares of PulteGroup Inc. fell as much as 4.9 percent Thursday morning after the national homebuilder reported that orders had declined 1 percent from a year earlier, blaming rising mortgage rates.
It looks like home prices are plateauing as supply lines increase, according to Bloomberg:
- Some of the most expensive markets, where sales are falling under the weight of prices, are now seeing substantial increases in supply, according to Redfin Corp.
- In San Jose, California, inventory was up 12 percent in June from a year earlier. It rose 24 percent in Seattle and 32 percent in Portland, Oregon. Those big jumps are from low numbers, so the housing crunch is still a serious problem.
- "Inventory has increased quite a bit," a Seattle agent tells Bloomberg. "We’re seeing less competition."
- In its preliminary July survey, 65 percent of Americans said it’s a good time to buy a home, the lowest since 2008, when the economy was still in recession.
And as the following chart of FHFA home prices, the recent home price plateau is starting to turn lower:
This as international buyers are dropping out of the US housing market in growing numbers, according to new reports, underscoring the general buyer fatigue on the rise.
"The affordability crisis may have reached a breaking point in Portland, San Jose, and Seattle,” said Settle-based real estate brokerage company Redfin's CEO.
At the same time, the average homeownership tenure increases to new all-time high of 8.09 years: homeowners who sold in Q2 2018 had owned their homes for an average of 8.09 years, up from an average homeownership tenure of 7.91 years in Q1 2018 and up from an average homeownership tenure of 7.83 years in Q2 2017, according to Attom.
"Buyers want to shop and take some time, as opposed to having to rush and throw offers in," a real estate agent with Windermere Realty Trust in Portland told Bloomberg of trying to manage sellers' expectations. "It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off."
And as supply grows, and buyers find more options to choose from, buyers are taking their time to pull the trigger:
While we have previously compiled these numbers in separate posts, here is a summary take on the current state of the US housing market:
- The homeownership rate in the second quarter was 64.3 percent, up from 63.7 percent a year earlier, according to U.S. Census Bureau data released Thursday.
- S&P CoreLogic Case-Shiller data hint at the softening. The 20-city index of property values rose 6.6 percent in the 12 months ending in April. After seasonal adjustments, the gauge posted its smallest monthly increase in 10 months, with New York, San Francisco and Washington reporting declines.
- Homeownership still remains out of reach for many Americans, especially for first-time and younger buyers. For existing homes, the median price climbed in June to a record $276,900, while properties typically stayed on the market for 26 days, unchanged from the prior three months, according to the National Association of Realtors.
That said, there are still reasons to be optimistic that we are not at the start of a new housing crisis: per Bloomberg:
“While there appears to be a slowdown in the growth rate of home sales and prices, it has not slowed rising homeownership,” Freddie Mac Chief Economist Sam Khater said in a statement — though he added that the rate is a full percentage point below the 50-year average, reflecting “the long-lasting scars from the Great Recession and the lopsided nature of this recovery.”
Market watchers note that the housing sector has strong support from a healthy labor market and steady economic growth, which indicates a stabilizing trend for home prices rather than anything close to the experience of the crisis, when property values plunged. And shares of D.R. Horton Inc., which builds a lot of starter homes, rose as high as 8.7 percent Thursday morning after the company reported a 12 percent jump in orders.
Still, a red flag is that the experts are starting to spin the narrative, usually a key indicator that a major turning point is dead ahead: "The rate of home sales, new and existing, has probably peaked," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "But it’s not going to roll over. It will gently decline." It was not clear why Shepherdson was confident of this.
Others were less sanguine: "Home prices are plateauing," said Ed Stansfield, chief property economist at Capital Economics. "People are saying: Let’s just bide our time, there’s no great rush. If we wait six or nine months we’re not going to lose out on getting a foot on the ladder... we’re now looking at a period in which prices move more or less sideways, or increase no more quickly than growth in incomes, over the next few years."
Which is a problem, because according to the latest Case Shiller data, home prices in all metro areas are increasing at a higher rate than incomes, and in 15 out of 20, the rate of price is more than double that of income growth.
And let's not forget the uber bubble that is San Francisco, where in just the past six months, median home prices increased by a record $200,000 to an all time high $1.62 million.
Finally, there is the threat that the Fed will hike right into a recession, making mortgages unaffordable: "no one knows how far and how fast borrowing costs may rise as the Federal Reserve raises interest rates", Stansfield said.
This was confirmed by the latest UMichigan consumer sentiment survey, which revealed that Americans believe current conditions to buy a homes are the worst they have been since 2011 due to high interest rates.
This also means that for most areas, we will not see a price surge just ahead of the next recession. Lenders and borrowers alike are less likely to let credit spiral out of control than in 2005 and 2006. And with financing tighter and wage gains in check, “there’s not much scope for prices to continue to increase sustainably” at recent rates.
The rate-driven cooling, in turn, could curb housing starts, “because builders tend to only build what they think they can confidently sell,” Stansfield said, which he noted is a potential silver lining, as the slowdown in inventory creation "will decrease the risk of a bust." Alternatively, it will also result in a broad slowdown in the economy as homebuilders hire less (or begin to fire) construction workers, while spending less on growth.
So where does that leave us? We'll let readers decide on their own where in Phase 2 of the housing market (shown below) the US is currently, with the reminder that nobody rings a bell at the top.