Everyone knows the housing market madness can’t last, so the first drop turns into a big drop

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Everyone knows the housing market madness can't last, so the first drop turns into a big drop


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Now they are wondering why.

By Wolf Richter for WOLF STREET.

Home prices soared double-digit from last summer, despite still losing 10 million jobs, and with 2.5 million mortgages still on hold, as mortgage rates rose from a historic low to a historic low. People bought a home without putting their old, now vacant home on the market because it pays to keep it, amid soaring house prices and low interest rates and the ability to cash out. money from the old house via a refi. As homes have taken over and sales have risen, more homes have not come on the market, inventories for sale have plummeted and prices have skyrocketed. But now sales have gone from a preliminary drop at the end of last year to a steep drop in February. And everyone is wondering why.

In February, sales of existing homes – single-family homes, condos and co-ops – fell 6.6% from January to a seasonally adjusted annual rate of 6.22 million homes, the National Association reported today. real estate agents. Year over year, sales from September to January were up 19% to 24.4%. In February, the year-over-year increase was down to 9.1% (data via YCharts):

Now everyone is wondering why the sales have plummeted.

Rising mortgage rates and affordability problems stemming from the double effect of soaring house prices and rising mortgage rates are at the top of the list. But note that many of the home sales that closed in February closed before February, and in January mortgage rates were just starting to climb from record lows at the end of the year. And we haven’t even seen the impact in the data of rising mortgage rates in late February and so far in March.

Inventory of houses for sale plunged to a record high in the January data series of 1.03 million units, and stayed there in February, accounting for 2.0 months of supply at the current pace of sales (up from 1.9 months in January ).

Why the 12-year drop in stocks for sale? There has been a structural change: the business of selling homes has changed. It used to take months to sell a house, from the time the house was listed in a print publication until the day the sale closed, which involved a lot of personal contact and paperwork. Now homes appear instantly in ads and are marketed online; potential buyers can view the home via video. Mortgage approvals are largely automated and lightning fast. As a result, the time period that houses stay on the market while waiting for processes to occur has been shortened. This reduces the inventory for sale. During the pandemic, technology surged into home sales with a leap forward and sped up processes.

The ghost inventory: Thanks to low mortgage rates and soaring house prices, people who buy a house feel no urge to sell the old house. They can simply keep the house vacant and take advantage of current price increases that far exceed the costs of ownership. In addition, they can refinance the mortgage and withdraw money from the vacant home, while speculating on further price increases. I personally know several people who have done this as part of their financial calculation.

The share of purchases of second homes as a percentage of total home purchases climbed to over 6%, a high in the data series by the AEI Housing Center, and well above the previous two years at this time. Some of them can be vacation homes, others can be part of the city exit, people just not selling their old homes:

Forbearance mortgages are still a big factor. According to the Mortgage Bankers Association, 2.5 million mortgages, or 5.1% of all mortgages, are still forborne, meaning lenders have agreed not to execute their mortgage. exclusionary right, thus allowing the borrower to skip mortgage payments. Many of these mortgages were already in arrears when they went into forbearance.

“Tolerance” does not mean “forever”, although it may now appear that way, given the repeated extensions. Exiting forbearance can take a number of ways, including marketing the house and selling it to pay off the mortgage.

Prices increase historical seasonality.

The median price of all existing homes jumped 15.8% year-over-year to $ 313,000, according to the NAR report. This was a 46.5% increase from five years ago. By type of home: For a single-family home, the median price jumped 16.2% year over year to reach $ 317,100; and for condos, it jumped 12.3% to $ 280,500 (data via YCharts):

As in so many other economic indicators, the well-established seasonality of the median home price has been canceled out during the pandemic. In the past, it would peak in June or July (the highs in the chart above), even during the housing crisis, then drop and hit the seasonal low in January or February. But in 2020, the median price peaked in October, then fell from November to January, and in February rebounded to the October level.

The Fed is smiling at rising long-term Treasury yields as a sign of economic growth and rising inflation expectations. Read... First signs that soaring mortgage rates are reducing pressure on the housing market

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