Sharp drop in home sales, soaring mortgage rates, shortage of supply: a new dynamic is emerging

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But wait… Supply suddenly exploded when mortgage rates jumped before the housing crisis. And for a reason.

Sales of used homes, condos and co-ops in December fell 4.6% month over month and 8.3% year over year, at a seasonally adjusted annual rate of 6 .1 million homes, reported the National Association of Realtors. . This was the fifth straight month of year-over-year declines, amid very tight supply and rising mortgage rates (historical data via YCharts):

US existing home sales - % change in seasonally adjusted annual rate

Existing Home Sales (% change over previous year)

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Seen over the long term, the seasonally adjusted annual rate of sales in December of 6.1 million homes was not only below 2020 highs, but also well below highs of the 2003-2006 period.

United States existing home sales in millions - seasonally adjusted annual rate

US existing home sales (millions of homes)

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Sales of single-family homes fell 5.9% for the month and 8.1% year over year, to a seasonally adjusted annual rate of 5.44 million homes.

Condo sales plunged 7.0% for the month and 9.6% year-over-year to a seasonally adjusted annual rate of 660,000 condos.

By regionthe seasonally adjusted annual rate of total home sales fell year over year in all four regions:

  • Northeast: -15.7%
  • Midwest: -2.6%
  • South: -5.3%
  • West: -10.2%

The scramble to lock in mortgage rates still low but rising

The average 30-year fixed rate for conforming mortgages in December was around 3.30%, up from the November range of around 3.20%. But in January so far, mortgage rates have skyrocketed. In the reporting week through Jan. 19, the average 30-year fixed rate hit 3.64%, according to the Mortgage Bankers Association (data via Investing.com):

U.S. 30-Year Fixed Mortgage Rates, Compliant - Weekly Data

U.S. 30-Year Fixed Mortgage Rates – Compliant

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The National Association of Realtors, back in its November report a month ago, expected the average 30-year mortgage rate to hit 3.70% by the end of 2022.

But the average daily 30-year fixed rate already hit 3.70% on Wednesday, according to Mortgage News Daily data.

There are now two dynamics at play: as mortgage rates rise, more buyers are shut out and they move away. But other buyers are stepping up their buying efforts, whatever the price, to lock in still-low mortgage rates.

“With mortgage rates set to rise in 2022, it’s likely that a portion of December buyers were intent on avoiding the inevitable rate increases,” the NAR report said.

Buyers will do this until mortgage rates reach a magic high, at which time buyers will start to pull back. Mortgage rates above the magic level have the effect of cooling the housing market, which happened in the second half of 2018 and in 2005/2006.

Mortgage rates hit 5.0% in November 2018. And they hit 6.6% in the summer of 2006. And that was it for the housing market.

At the end of 2018, the stock market was in turmoil. The housing market was cooling. Everyone was going wild. And the Fed, which had been raising rates and shrinking its balance sheet all year, was being hammered publicly daily by President Trump.

At the time, inflation was very close to the Fed’s 2.0% “core PCE” target. So in 2019, the Fed began signaling its infamous U-turn. He canceled further rate hikes. In mid-2019, it ended the reduction of its balance sheet. In September 2019, he began bailing out the booming repo market.

Now it’s a different scenario: the worst inflation in 40 years

In November, core PCE inflation reached 4.7%. December’s core PCE inflation rate, which will be released next week, is likely to be around 5.0%. And the Fed is starting to crack down – way too little, way too late, but it’s starting. It is therefore unlikely that the Fed will turn around as long as inflation is so hot.

Buying a house “now” to secure a lower mortgage rate is a classic reaction to the initial phases of rising mortgage rates, also promoted by the real estate industry. It is only when mortgage rates reach a magic threshold that the volume of sales dries up.

The NAR also today expressed this view that higher mortgage rates this year will hit the housing market and existing home sales will “slow slightly in the coming months due to rising mortgage rates.”

The median price climbs less

At $354,300, the median price remained unchanged for the month and was up 14.6% year over year. Year-on-year price spikes had peaked in May and June at more than 23%. Since June, the median price has fallen 2.3% – a seasonal drop in the second half.

US median sale price of existing homes, expressed in dollars

US Median Existing Home Selling Price ($)

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Supply of homes for sale fell to a record 1.8 months of sales. The number of unsold homes on the market fell to 920,000, seasonally adjusted.

But supply always comes out of the woodwork when interest rates rise and prices stagnate or fall. We saw it during the housing crash: All kinds of offers suddenly hit the market, with investors who owned multiple homes being among the largest group to let banks worry about those homes when buyers didn’t presented.

“Individual investors or second home buyers, who make up many cash sales, bought 17% of homes in December, compared to 15% in November and 14% in December 2020,” according to the NAR.

Once houses are treated as investment products, like stocks, and not as houses, there can never be enough supply during a bull market. But when mortgage rates rise and the market turns, these investors and second/third home buyers can easily put their vacant homes on the market – and they do. And suddenly, there is supply coming out of the carpentry.

Note the house storm surge that suddenly flooded the market in 2005 and 2006 as mortgage rates surged just before the housing crisis:

Number of existing homes offered for sale in the United States

Number of existing homes offered for sale in the United States

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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