Real Estate Talking Points for Friday, December 1, 2023

    Real Estate News in Brief


    Housing starts improved slightly. Based on October starts, builders are on pace to deliver 1.4 million new housing units over the next 12 months, 70% of which are single family homes. But don’t forget that there is a record amount of multifamily units already under construction and nearing completion. [Census Bureau]

    Existing home sales for October fell 4% MoM to an annualized rate of 3.79 million, a 13-year low. Since January 2022 (when existing home sales were 6.34 million SAAR), existing home sales have plunged 40%! Sounds terrible, right? But here’s the good news: I wouldn’t be surprised if this is the bottom for this 20-month downturn. More on this later. [NAR]

    The Realtor’s Confidence Index for October didn’t show much confidence, with only 7% of agents saying that they expected a YoY increase in buyer or seller traffic in the next 3 months. That said, 66% of homes sold in October were on the market less than a month, 28% of homes sold above their listing price, and there was an average of 2.5 offers per home sold. [NAR]

    Builder confidence may have cratered, but new home sales remain strong. In October, new homes sold at an annualized pace of 679,000 units. That’s 6% below September 2023, but 18% above Oct 2022. [Census Bureau]

    The media made a big deal out of the 18% YoY drop in median new home prices, but that’s mostly due to “mix.” In October 2022, 49% of new homes sold were priced above $500,000. By October 2023, this had fallen to 32%. Builders are redrawing plans and delivering smaller/more affordable homes, and that’s pulling the median down.

    Case-Shiller: Home prices just keep rising. National home prices climbed 0.7% MoM in September, the 8th-straight monthly increase. All 20 big city indexes saw MoM increases, and 13 set new all-time highs. [S&P Global CoreLogic]

    FHFA: Yup, we’re seeing the same thing. On FHFA’s (slightly different) numbers, national home prices rose 0.6% MoM in Sept, the 13th-straight monthly increase. All regions except the Pacific saw prices rise. [FHFA]

    Rents are now LOWER than last year! Rental rates always fall (month over month) in winter — it’s a seasonal thing. But for rents to now be down 1.1% YoY is unusual. It’s also a very promising sign that overall inflation levels will continue to ease. [Apartment List]

    Inflation dropping closer to target! “Headline” PCE dropped from 3.4% YoY in Sep to 3.0% YoY in Oct, while “core” PCE eased from 3.7% to 3.5%. The recent fall in oil/gas prices helped the headline figure, while the continuing decline in “shelter” cost growth was a tailwind for core PCE. As a reminder, the Fed’s target for core PCE is 2%. [BEA]

    Pending home sales hit by rate rise. October pending sales (contract signings) fell 1.5% MoM, as mortgage rates rose to above 8% during the month. Contract signings were at the lowest level in more than 20 years. This suggests that existing home sales for November will be around 3.8 million. [NAR]

    On the Case (Shiller)

    All figures quoted here are seasonally adjusted.
    Home prices continued to rise in September, with the national index up 0.7% MoM. That’s the 8th-straight monthly increase. Year-to-date, the national index is now up 4.6%, which annualizes at 6.1%.

    As Craig Lazarra, Managing Director at S&P DJI noted, “[this] is well above the median full calendar year increase in more than 35 years of data. Although this year’s increase in mortgage rates has surely suppressed the quantity of homes sold, the relative shortage of inventory for sale has been a solid support for prices. Unless higher rates or exogenous events lead to general economic weakness, the breadth and strength of this month’s report are consistent with an optimistic view of future results.

    In other words, unless something breaks, prices are likely to keep rising. And the positive price momentum is extremely broad-based:

    • On a seasonally-adjusted basis, all 20 big city indexes saw prices rise MoM.
    • On a non-seasonally-adjusted basis, 15 big city indexes saw price rise MoM. [Remember: It’s totally normal for prices to fall in winter, so the fact that only 5-out-of-20 did is notable.]
    • As we predicted last month, the Los Angeles, San Diego, and Tampa indexes set new, all-time highs in September, having erased the declines seen in the 2H of 2022.
    • That means that 13-out-of-20 big city indexes are now setting new, all-time highs each month.
    • Year-to-date, the San Diego index is up 8.2%, the Detroit index +7.0%, and the New York City index +6.9%.
    • Of the 7 big city indexes that are still below their mid-2022 peaks, only San Francisco (-8.7%) and Seattle (-6.6%) remain significantly in the hole. But if current trends continue, both could be hitting new highs by mid-2024.

    Inventory levels have continued to rise (not normal this time of year) and mortgage rates have recently dropped from above 8% to nearly 7.1%. The Fed has almost certainly stopped raising short-term interest rates, and may start cutting rates as early as May 2024.

    I wouldn’t be surprised if the existing home sales for October 2023 (3.79 million units on a seasonally-adjusted, annualized basis) proves to be the bottom for this 20-month downturn. Since January 2022 (when existing home sales were 6.34 million SAAR), existing home sales have plunged 40%!

    The NAR itself forecasts 15% recovery in existing home sales in 2024, driven in large part by their assumption that 30-year mortgage rates will drop below 7% by the 2024 spring selling season. (And we’re almost there already on rates!)

    Mortgage Market

    Average 30-year mortgage rates continued to trend downward, now approaching 7%. The most recent drop was driven by: 1) surprisingly “dovish” comments from habitual Fed “hawk” Christopher Waller, and 2) better-than-expected PCE (inflation) figures.

    Reminder: “Hawks” want higher interest rates and are concerned about high inflation and tight labor markets. They’re less worried about economic growth. “Doves” want lower interest rates because they are concerned about slowing growth and recession risks.

    “I am increasingly confident that policy is currently well-positioned to slow the economy and get inflation back to 2%…[if the decline in inflation continues] for several more months…three months, four months, five months…we could start lowering the policy rate just because inflation is lower. It has nothing to do with saving the economy. It is consistent with every policy rule. There is no reason to say that we will keep [the policy rate] really high.” — Christopher Waller


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