Rate Hikes Take a Toll


In April, new home sales plummeted 16.6% from March’s downwardly revised figures. Sales hit a pace of 591,000, the lowest level since April 2020, when the lockdowns first took effect. Sales are recorded at the contract signing as opposed to closing, which makes them a better lead indicator of where the market is going than existing sales.

The drop in new sales was concentrated at the lower end; the median and average prices continued their upward march. The surge in the cost of new construction and higher mortgages is crowding out first-time buyers from the market. Trade-up and vacation housing demand is also cooling. Investor activity remains stable; there are more all-cash buyers in the investor market, although recent rate hikes and corrections in the financial markets do pose threats.

Builders continue to face supply chain challenges and low availability of labor and land. Only 28% of new homes sold in the month were completed; prior to the pandemic, that figure was around 40%. The recent lockdowns in China and the war in Ukraine are going to add insult to injury since those shocks have yet to be fully felt.

Mortgage applications to purchase a home plunged 12% in the middle of May. Mortgage rates remain above 5% since April and are expected to hit 6% before the end of this year. While some buyers jumped at the chance to lock in a lower rate when mortgage rates started to climb, more are now sitting on the sidelines, delaying the decision to purchase a home. The average monthly payment has already jumped by $500 from a year ago. Brace for the market to fall further in the months to come.

Existing home sales fell for the third consecutive month in April to a rate of 5.6 million. The losses were concentrated in the South and West, the largest and currently most overvalued housing markets. Prices in the South alone are up 22% from a year ago. Many who moved to the Sunbelt to work from home or purchase a vacation home have found themselves unable to keep up with skyrocketing prices. Rentals are also in demand as vacancy rates remain at record lows. These markets are the most at risk of a price correction.

The rise in mortgage rates has yet to be fully seen in the existing home market, which tracks contracts signed one or two months prior to closing. The silver lining is that with the expected slowdown in the pace of sales comes more supply. Current sales point to about 2.2 months’ supply; six months are needed for prices to stabilize at the national level.



Bottom Line


The Federal Reserve is pumping the brakes; the most interest-rate sensitive sectors, notably housing, are cooling. This is not the housing bust when subprime mortgages slipped into foreclosure; buyers have much more equity in their homes today. But, housing prices will not be providing the lift to household wealth they have in recent years.





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Copyright © 2022 Diane Swonk – All rights reserved.  The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.


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