Posted January 2023
Home prices nationwide are going down. The latest October 2022 Case-Shiller U.S. National Home Price Index showed a continued decline of about 3% from its peak value. Month-on-month, it’s less; only about a 0.8% slide.
Yes, there is a downward trend, but hardly a head-spinning crash that everyone’s prognosticating. There is a ton of fearmongering out there, predicting a “Complete Meltdown,” and claiming that “The Housing Crash Is [already] Here” or even calling it “The Great Collapse of 2023” or “The Collapse in the Mother of All Bubbles”.
Bold, blaring, loud and often unfounded headlines such as these, of course, attract a lot of YouTube traffic. But are these claims supported by real data? Well, let’s have a look. Here is an alternative to the Case-Shiller index, from the US Federal Housing Finance Agency, based on sales prices and appraisal data.
And… it does not report any decline in home prices!
This chart is based on the U.S. Census Bureau data. It too reports no drop in home prices.
On the contrary, here we observe a slight increase in home prices for the latest reported period.
What? How is this possible? If you’ve been paying close attention to the housing market trends in your neighborhood or town, you may be seeing a different picture. So, how is it that these indices are seemingly in conflict with what you’re observing on the ground?
First, and probably most important, all of these are indices, which are artificially created averages or measures of central tendency, often unitless, are designed to provide a general sense of broad movements in a sea of individual data points.
Second, not only that these indices measure averages. They do so over a huge, huge number of nationwide observations. And while there are benefits to be reaped from large-scale data, the most obvious cost of a single nationwide index is that you clump together vast and very diverse property markets, from sea to shining sea. This is why, in every episode of my market report, I examine very detailed property sales data from a local source.
Third, all of the above indices suffer from a significant time lag.
The Case-Shiller index, for example, is a 3-month moving average, and as such it’s published with a 3-month lag. In a fast-moving market, 3 months can actually be pretty significant. In fact, in our practice, when my partner and I are asked to produce a CMA (a comparative market analysis for a house), we rarely go beyond 3 months, unless the market is changing very slowly or there aren’t enough comparable data points for the subject property.
Let’s now look at more up-to-date, albeit also nationwide numbers.
Redfin reports a drop in the median home prices, from a 14.9% YoY growth in May 2022 down to (still a positive) +1.2% growth in Dec. In other words, year-on-year prices still went up, but they are down from their peak.
Curiously, Zillow, on the other hand, shows no decline in home prices at all. So, per Zillow, the median price continued to go up, only at a much slower pace.
When measuring the health of the housing market, it helps a great deal to look, not just at home prices, let alone broad averages thereof, but also at the so-called macroeconomic determinants or factors affecting the supply and demand in the housing market. I won’t go over many. Just a couple of the most important ones.
Currently, these factors are putting a downward pressure on the housing prices, unfortunately…or fortunately, depending on which side of the market you belong to right now.
For starters, the likelihood of an impending recession has grown noticeably in the past few weeks:
- While the Dow Jones Industrial Average and S&P 500 remained largely flat, Nasdaq gave back a whopping 7.5% in the past 6 months!
- Investors are nervous, especially bond investors. Stock investors … Well, they care about the performance of stocks, while bond investors are generally more concerned about the health and direction of the overall economy. However, according to the New York Fed’s brand new Corporate Bond Market Distress Index or CMDI, bond investors’ stress level came down a bit in the last few weeks of 2022.
- And then there is this yield curve inversion, which has been a particularly accurate predictor of recessions… The yield curve has predicted every recession since at least the 1960s.The spread between the 10-year and the 2-year Treasury note has been negative. Actually, pretty deeply negative, since July 2022. I don’t want to digress too much, but you can read up on the yield curve inversion by clicking on the link to a brief Financial Times explainer here.
- And finally, while the current 3.5% unemployment rate is still near the lowest level in decades, some industries, such as tech and finance are beginning to lay off workers in by tens of thousands. Although it’s not much for an economy with the labor force of a-165M, it is certainly a trend worth keeping an eye on, as employment and GDP are closely related.
Second, the interest rate is much higher than it was a couple of years ago. The US average 30-year fixed rate has climbed from the bottom of the pit at 2.65% in January 2021 to 6.13% right now. Yes, the interest rate came down from the recent high of 7.08%, but it’s a lot higher than it was in the recent rosy past.
- However, as I’ve said before, while 6% is well above the decade average, it is really not freakishly high. In fact, it’s relatively close to the 25-year average, which is 5.18%; now, 2.65% is the lowest 30-year fixed average interest rate Americans have ever seen. So, you can decide on your own, which of the two rates is the deviation from the norm.
- However… The Fed isn’t done with rate increases yet. Jay Powell acknowledged that the restrictive policy can cause pain, with delay, but stressed that “ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time…”
OK, now, again, it’s time to get my microscope, and to analyze the granular local data. And even though these data are specific to Palm Beach County FL, the very detailed, individual-level, real transaction nature of these data help us see the incredible, fascinating patterns in minute detail and make out the trends that are easily generalizable to the rest of the country.
By the way, it’s worth mentioning that my dataset has grown to almost 300K observations, which is great because such a large dataset helps ensure statistical robustness.
Now, let’s get right to it.
This time, I’m going to use 6 key indicators of the health of the housing market. I’ve updated my existing 5, with state-of-the-art statistical technology, and added a new one. These key indicators are: (1) the most recent changes in home prices; (2) days on the market; (3) the share of homes that sold above list price; (4) the share of listings that had to reduce their price; (5) the share of listings that negotiated the final list price; (6) and the share of homes sold for cash.
Indicator # 1: Price Trends
This is a chart, showing housing price trends in the Palm Beach County in the past year.
The median price of single-family residences in the Palm Beaches continued its downward slide last month, from $610K in Nov to $575K in Dec of 2022, or 5¾ %. This is $100K, or 17%, below its peak value of $675K just 6 months ago.
But if we roll back another 6 months, $575K is actually 3% higher. In December of the previous year, the median sold price of all single-family homes in the Palm Beach County was under $560K.
Roll back even more, to Dec of 2019, to the “carefree time” before the pandemic. This median was just $380K. It’s kind of hard to believe! But there it is.
So, the median price of $575K is lower, much lower than its June 2022 peak value but still more than 50% higher than only 3 years ago.
Townhome prices also dipped down, but not by nearly as much as prices of single-family homes. The month-on-month drop in the median price of townhomes was 1.4%, settling at just under $386,000, which is 6% below its peak value of $410K in May, but 15% above the price of $335K a year ago.
And do you know what townhomes used to cost in the Palm Beaches in Dec 2019, on average? Or median, to be more precise. Are you ready? OK… So, the median price of townhomes in the Palm Beach County at the end of 2019 was … $245K! That’s 57.5% below the current prices.
And finally, condo prices actually came back up a little, from $327,000 in Nov to $335,000 in Dec. Still, 13.4% lower than at the zenith in last April. Again, rolling back to just before the pandemic time, the median price of condos in the Palm Beaches was… $219,000, or 53% lower than today.
Indicator # 2: Days on the Market
Days on the Market (DOM) is our measure of the comparative strength of supply vs. demand in the housing market.
How do I explain this weird Sept 2022 spike in DOM? I mean, the December DOM is a normal-looking 32 days: below the historical value but well-above the feverish pandemic figure that dipped below 10 days. But what is the deal with this Sept-Oct skewer?
There are several possible explanations.
First, the interest rates. Look at how the 30-year fixed rate, which was relatively stable at around 5%, from late spring to August, shot up to above 7%, the highest rate we’ve seen in 20 years! That must have spooked a lot of people. And I don’t blame them.
This Mortgage Bankers Association MBA chart shows a steep decline in mortgage applications right around the start of the new school year.
Speaking of the school year… There is a certain layer of population that tries to time their home buying to settle in at their new home before the start of the school year, and not have to deal with the stress of closing when kids are getting adjusted to their new classes and schedules.
And finally, it was right around that time when a lot of people were talking about a potentially deep recession in the coming year. And, right around that time, the stock markets suffered deep losses (DOW, Nasdaq, S&P).
Those fears receded somewhat… After better-than-expected business earnings reports and the continued resilience in the labor market. But as mentioned before, a recession, probably a mild one is still expected this year, although a more painful one cannot be ruled out.
Indicator # 3: % of Homes Sold Above List Price
Normally, historically, only about 6 or 7 % of properties sold above their asking price.
This figure skyrocketed to 42% in April 2022, and then nosedived to a near-normal 9% in November, before going back up a little to 15% in December.
I think it’s worth mentioning here that many of these indicators will likely see some, hopefully small, adjustments in the following month or two. That’s normal. That’s because it takes time for closings to happen and for these closings to be reported in the MLS. So, for example, days on the market are usually initially biased down… you know, coz the proportion of those homes that are destined to languish on the market for many months and aren’t yet done pulling up the average, remains high for the most recently listed homes.
Indicator # 4: % of Listings that Lowered the Original List Price
It’s normal for home sellers to initially ask for more, “to test the market”, so to speak, and then be hit by the reality, and adjust their list price.
Historically, this number has hovered around the 44% mark. Then, the pandemic happened, when only 15- to 20% of listings were deemed overpriced and had to bring down their price. The turnaround point happened around April-May of 2022, moving this indicator back towards its normal range but in the latest 3 months we are seeing a reversal, down to 28% in December.
Indicator # 5: % of Listings that Sold Below the List Price
If you’ve been wondering how many home sellers are willing to negotiate the final price down, this chart says that most seller do.
The historical average is at about 83%. Of course, during the pandemic, less than 2/5 were open to price reductions. Sellers reigned supreme in the residential property market! But the curve turned back up, in late spring of last year, heading towards the normal range, until that strange reversal again in the latest reported months.
This reversion to the pandemic averages is observed across the indicators in the latest months. The Days on the Market has swung around, % Over Ask is creeping back up, fewer sellers are offering price reductions, and fewer sellers are willing to negotiate the final price. Why? What is happening? It’s as if we are headed into a new pandemic.
Well, the most likely explanation for this is that December inventory has always been an aberration. Take a look at this chart.
It shows that in the winter holiday season, that’s between Thanksgiving and the New Year, people are too busy to list their homes for sale. It’s a festive time. People spend more time with each other, plan big dinners, shop for presents, clog roads and airports in the quest to see family and friends, and even try to rekindle old relationships. Plus, kids are out of school.
So, new listings in December tend to take a deep dive. But almost invariably, it’s followed by a sharp rebound in January. I expect the same to happen this year… Come back next month for a new episode of my market report, if you want to see if I’m right.
Indicator # 6: % Cash Purchases
And finally, the share of cash purchases.
This indicator has hit the highest level in my data, which go back 6 years, to January 2017. What’s the main reason, you ask?
I have two most likely possibilities.
The first and most obvious reason is higher interest rates, tipping the balance towards cash buyers and investors.
And second, we’re still waiting for more complete data on the most recent closings.
One last thing. As I’ve mentioned previously, there is a huge deal of seasonality in cash purchases. They tend to go up in the first quarter of every year and bottom out in mid-summer. Take a note, if you’re thinking about listing your home soon because this indicator, combined with the number of new listings, days on the market, % sold below list price, the current mortgage rates, and other important intel can mean a big difference in your final take-home. Talk to your local realtor for specific advice.
This is all I have for this month. またね Matané!