• Little Relief in Sight for the Beleaguered Housing Market

    A reprieve in mortgage rates from November to January brought hope that the housing market was starting to loosen up, but recent data show that there’s still a long way to go to get the market into better balance.

    Sellers and buyers remain at odds over pricing, existing homeowners are staying put, and homebuyers are still facing steep financing costs that are out of reach for many.

    In the market for newly constructed homes, developers are flush with inventory and seeking buyers who might take advantage of any step lower in mortgage rates to now make a purchase decision. To further ease the buyer's budget burden, builders are offering concessions such as mortgage rate buy-downs to boost sales and forestall cancellations. This has been fairly successful strategy. In January, new home sales rose to an annual rate of 670,000 homes, up 7.2% from December.

    But existing home sales, as reported by the National Association of Realtors , fell by 0.7% in January to an annualized rate of 4 million, their 12th consecutive month of declines and now lower than their trough in May 2020 when the pandemic kept home showings to a minimum. We’d have to go back to October 2010 to see fewer home sales.

    The rise in new home sales, which account for less than 15% of overall home sales, more than offset the fall in existing home sales, as total sales rose slightly over the month, the first increase since January 2022. Moreover, an increase of homes under contract at the end of January portend that closed sales could come in higher in February. The Realtor association's pending home sale index grew by 8.1%, the largest increase since June 2020, as homebuyers pounced on temporarily lower mortgage rates.

    Mortgage rates, though, resumed their path higher throughout February as inflation showed no sign of retreating. In mid-February, the Bureau of Labor Statistics reported that the core consumer price index rose by 0.4% in January, and later in the month, the Bureau of Economic Analysis reported that the core personal consumption expenditures price index, which is the Federal Reserve’s preferred inflation measure, grew by 0.6% in January, faster than expected.

    The Fed has promised to be data dependent, and these two data points along with strong personal income and spending data suggest that a larger rate hike than previously expected could come at the policymakers' meeting in March, and that rates could remain higher for longer. Chatter of a Fed pivot later this year is dwindling.

    As a consequence, applications for mortgage loans plummeted over the course of the month. The Mortgage Bankers Association reported that its index of mortgage applications for purchase fell by 18% during the week ending Feb. 17 and were 41% lower than the same week in 2022.

    While the median single-family home price was 1.3% higher than a year ago, according to National Association of Realtors, prices have been falling since the second half of the year. The reported median price peaked in June 2022 and has declined by 13.7% over the past seven months. Adjusting for seasonality, the median price has fallen by 3.7% from a May 2022 peak.

    The S&P CoreLogic Case-Shiller Home Price Index , which tracks repeat sales, shows similar contraction in prices, with the index declining by 0.3 over the month, its sixth consecutive month of decline, but this is still 5.8% higher than a year ago. The index is lagged with the most recent figures reflecting homes sold from October to December. On the bright side, this was the slowest pace of annual home price gains since the middle of 2020.

    On the demand side of the market, a collapse in affordability could continue to keep many potential homebuyers out of the market. The National Association of Realtors' housing affordability index, which measures the ability of the typical family to earn enough income to qualify for a mortgage loan for the purchase of a typical home, has remained below its 2006-trough levels since May 2022 (after seasonal adjustments). The latest seasonally adjusted reading in December at 95.8 is a modest improvement from 91.2 in October, but neither incorporate the latest increases in mortgage rates so we could see that measure move lower in coming months.

    Even this restrained demand is still facing very limited supply. The number of existing homes that are on the market for sale is growing after adjusting for seasonality, albeit at a snail’s pace. Many homeowners are locked into mortgages with sub-3% rates, a far cry from what they would be able to finance a new home for were they to move, hence a reluctance to list their properties. The National Association of Realtors reported that 980,000 homes were on the market in January, compared to 850,000 homes a year ago. These figures are still far cry from their pre-pandemic levels, lower by roughly 40%.

    What We’re Watching …

    We’ll have to wait an extra week to hear about the February employment report this month, giving us some breathing room before the next indicator is released measuring the strength of the labor market. The Federal Reserve is focused on jobs as a precursor to wage growth, consumer spending and inflation. With jobless claims generally flatlining, we aren’t seeing any loosening of the labor market as would be needed to cool inflation despite the many recent layoff announcements. Take another breath.

    CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.