Parsing Housing Market Data

Major stock market indices fell this morning in reaction to weaker economic data. The Dow is currently off 290 points and the S&P 500 is down 1.1%. Over the last week the VIX—a measure of fear among traders—has run from about 14 to 18.6. Remember, we’re in the middle of a seasonally weak period. And I think traders are still coming to grips with the Federal Reserve’s pledge to keep interest rates higher to longer. How high, and how long? We’ve seen a re-pricing of interest rate expectations, and that is hitting both stocks and bonds.

The Conference Board’s monthly survey of consumers shows deteriorating sentiment. While the current conditions portion of the survey improved nicely, future expectations sagged unexpectedly. Until now, household finances and consumer spending have remained resilient despite the fact that prices for all kinds of goods and services are a step-function higher than they were before the pandemic. But elevated prices—gasoline being the poster child—are beginning to weigh on attitudes.

New home sales fell 8.7% last month, essentially reversing July’s 8% gain. That’s the largest monthly decline in almost a year. The list of headwinds for housing are well known: very low inventory, high mortgage rates, and low affordability. But last month’s decline doesn’t break the uptrend in sales activity in place since August 2022. And the current annualized rate of new home sales transactions, 675,000, is about the same as it was in 2019 before Covid screwed up everything. One reason new home sales are holding up is that homebuilders are finally beginning to catch up with demand after years of under-building. The inventory of new homes for sale is now about 436,000, which equals about 7.8 months of supply.

Existing home sales, which account for the lion’s share of transactions, are clearly restrained by factors listed above. The current annualized rate of sales is around 4 million, which is roughly equal to the lowest rate during Covid. Keep in mind that pre-Covid transactions ran between 5 million and 5.5 million per year. Inventory is a huge problem as it has sunk to just 1.1 million, which equals only about 3 months of supply. Fewer people want to sell their homes. Most homeowners hold mortgages with rates under 4% and are loath to relocate and assume a rate over 7%.