Some home sellers understand the new reality and are cutting prices, while others are stubbornly allowing their properties to linger on the market.
After two banner years for home sales during the heights of the pandemic, when housing demand went through the roof and home prices rose by double digits on a percentage bases, but for the last few months “the entire housing market is cooling off very rapidly,” said economist Ben Ayers at Nationwide insurance.
Home sales see biggest drop since the start of the pandemic.
Home sales dropped 19.3% year over year in July to their lowest level since the beginning of the pandemic, when the housing market was at a near standstill. That’s also the biggest annual decline in U.S. home sales in more than a year, a reflection of the continued cooling effects of 5.4%-plus mortgage rates and nationwide economic uncertainty. Home sales dipped 4.1% from the previous month, the sixth-straight monthly decline. Some prospective homebuyers were sidelined because they were priced out of the market; others were wary of potential home-value declines in the near future.
Home sales were down, but prices remain high despite price cuts.
According to the National Association of Realtors®, July 2022 existing-home sales were down 5.9% from June and 20.2% from one year ago, with all four major U.S. regions recording month-over-month and year-over-year declines.
The median existing-home price for all housing types in July was $403,800, up 10.8% from July 2021 ($364,600), as prices increased in all regions and produced 125 consecutive months of year-over-year increases, the longest-running streak on record. Yet, while the immediately aforementioned are positive, if we look at month-over-month results, July prices were down 2.4% from June’s average at $413,800.
These conflicting data points led NAR Chief Economist, Lawrence Yun, to state: “We’re witnessing a housing recession in terms of declining home sales and home building. However, it’s not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price.”
In August, the Fed holds its annual meeting in Jackson Hole, interest rates poised to rise, again.
Home price appreciation is slowing fast across the country under the weight of higher mortgage rates and increasing inventories. Clearly, a slowdown in home prices is necessary if Federal Reserve policymakers intend to cool inflation and restore affordability to the housing market. The challenge for The Fed is to prevent the deceleration from becoming a collapse, but monetary policymakers have a chance to pull it off.
The Fed is coming in hard and fast on the 5% mark that was common in the five years before the pandemic, which would be consistent with its goal of bringing inflation back under control.
Right now, the Fed is between a rock and a hard place. If the central bank starts to ease up on hiking interest rates, it could lose its grip on inflation. But if it continues to raise rates aggressively, it could unintentionally or possibly intentionally put the U.S. in a recession and create widespread job losses. We mention “possibly intentionally” as the Fed seems to be prioritizing their inflation mandate over their full-employment mandate as real wages have lagged inflation, so inflation’s regressive “tax” is hurting those who can’t afford it the most.
Deutsche Bank economists anticipate Fed Chair Jerome Powell will reiterate the Fed’s commitment to controlling inflation. They also think he will emphasize that if the Fed hikes interest rates by 50 basis points as opposed to 75 basis points, which it did for the past two meetings, it “in no way signals the Fed’s inflation fight is over.”
Does a cooling market mean a more balanced supply of housing stock?
Most real estate economists believe a 4–5-month supply of available homes on the market to be balanced. U.S. existing-home sales fell 5.9% in July to a seasonally adjusted annual rate of 4.81 million. Expressed in terms of the months-supply metric, there was a 3.3-month supply of homes for sale in July, up from 3 months in June. Before the pandemic, a four-month supply was more the norm.
It is still a tight market, but more homes on the market could be a good thing for buyers. In July, homes remained on the market only for 14 days, on average. Pre-pandemic, the average time for homes to stay on the market was a month. The decline in home sales comes as mortgage rates have doubled and recession fears spook buyers. Perhaps a silver lining of increased mortgage rates is that the pendulum is slowly swinging to the prospective homebuyer’s side….at least in some areas of the country.