Exisiting Home Sales Tumble in September
Existing home sales declined 3.4% in September, marking the sixth consecutive month that sales have fallen. Existing home sales track closings, which tend to reflect contracts signed one to two months earlier, so the most recent drop is not likely related to disruptions from Hurricane Florence.
Unfortunately, the slide in housing is the real deal. Virtually every leading indicator of housing demand has been trending lower for several months (mean-reversion lookout), including pending home sales mortgage purchase applications and the proportion of consumers stating that now is a good time to buy a home.
The slide in home buying has coincided with rising mortgage rates and follow years of rapid price increases, which have collectively taken a toll on affordability. Most of the drop in affordability this year, however, has come from rising mortgage rates. The latest housing affordability data do not reflect the most recent run-up in rates, which has sent a further chill through mortgage purchase applications.
Earlier in the cycle, sales were primarily held back by the lack of for-sale inventory. The lack of homes for sale is less of an issue today. Inventories have been trending higher, as homes are not selling as quickly as they were a few months ago. Unsold inventory is currently at a 4.4-month supply, up from 4.3 months in August and 4.2 months a year ago.
The National Association of Realtors (NAR) notes that homes sold in September typically stayed on the market for 32 days, up from 29 days in August but down from 34 days a year ago. Demand varies considerably by market and price point. Midland and Odessa, both in booming West Texas (“Drill Baby Drill”), are two of the strongest markets, as are Boston and Columbus, Ohio. Some of the hottest markets out West, however, have cooled considerably(Who wants to buy a home if they think it will be burned down next summer?), particularly in higher-priced markets such as the San Francisco area.
Home price appreciation has also cooled off. The latest data show the median price of existing home sold in September was just 4.2% higher than it was one year ago. The year-over-year change in the median price has been trending lower for the past six months, and the moderation in the NAR series is evident in other prices rather than above them, which reflects a more normal market.
I suspect the housing market to level off and begin trending higher in the coming months. I see a cap on interest rates as the Fed continues to raise interest rates into a domestic slowdown. I foresee the “deflation domino effect” taking hold Q4 ’18 – 2Q ’19.
As the Fed raises interest rates, the short-end of the treasury curve (2-year) will rise and the 10-year will fall because the assumption is that the economy is bullish, therefore, leading some to believe the underlying domestic economy is bullish as well. I believe this is a wrong assumption.
Furthermore, as the Fed is raising the short-end of the treasury curve the US dollar will appreciate, oil prices will fall from their recent highs. In other words, “Deflation’s Dominoes.”
Looping back to housing, and with regards to the mean reversion of the sales data I am expecting to moderate in the winter months(seasonality), the seasonally-adjusted data might pop higher. Such a rise would not signal any fundamental improvement to the overall economy, but instead as a rate-sensitive play.
Risks to this assumption include the withdrawal of international buyers from the market, and recent tax law changes that have added an additional hurdle for potential new buyers to enter the housing space.
-R.W.N II, yours in 322.
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