Welcome back to this month’s housing market briefing.
Let's begin by taking a look at our usual macroeconomic indicators, which include national home price indices, the overall health of the economy, interest rates, and the volume of mortgage applications.
Starting with home prices, the Case-Shiller Index continues to reveal a slight dip for 7 of the past 8 months, with a minor uptick in home prices in February.
This broad index masks significant regional differences. For example, home prices on the West Coast of the United States, most notably in San Francisco (-10%), Seattle (-9%), and Portland (-3%) declined, while in the East prices actually went up, year-over-year, most notably in Florida (Miami, 10.8%, Tampa 7.7%).
However, given the cloudy outlook for the overall economy, these moderate price gains in the Eastern United States aren’t likely to last.
Speaking of the overall economy, The Conference Board reports that its Leading Economic Index (LEI)
“… fell by 1.2 percent in March2023 to 108.4 (2016=100), following a decline of 0.5 percent in February. The LEI is down 4.5 percent over the six-month period between September 2022 and March 2023—a steeper rate of decline than its 3.5 percent contraction over the previous six months (March–September 2022).”
The Chicago Fed National Activity Index (CFNAI) is equally pessimistic about the general economy, with 5 negative values in the latest 6months between Oct 2022 and March 2023.
The good news is that as of May 10th, the growth rate in consumer prices has come down to under 5%, However, inflation is still considerably higher than the Fed’s 2% target rate. And therefore, it’s difficult to predict if the Fed is finally going to stop, or at least pause, its restrictive monetary policy, after having raised the federal funds rate 10 times since March of last year.
Correspondingly, in the mortgage sector, the latest reading of the average 30-year fixed rate on May 11th was 6.35%. Mortgage rates have exhibited a relative stability since November of last year, hovering around the mid-6% rate.
The volume of mortgage applications has been relatively stable too, since the final quarter of last year. Stable at a very low level, of course, settling in a low valley after coming down from the towering summits of 2-3 years ago.
Zooming down to the local level, because the housing market is hyper-local by nature, we see that home prices in the Palm Beach County FL offer a picture of relative stability.
And again, keep in mind that while my local data are applicable in LEVELS only locally, the TRENDS, or movements in the data, can be generalized to many other housing markets in the country.
So, why aren’t home prices plummeting as some industry analysists have expected?
That’s happening in part because the supply of homes is still very, very tight. The number of new and active listings both locally, in Palm Beach County, and nationally is less than half of its normal historical level. New construction starts in the US are down.
Additionally, almost two-thirds, per WSJ, of primary mortgages are below 4%. So if would-be-home-sellers sell their current home to buy another house, they’d be facing the interest rates that are at near 15-year highs. And therefore, most sellers are staying put.
On the demand side, the higher interest rates have seriously dampened buyers’ appetites. However, the population of Palm Beach County has grown and continues to grow. If you’re a local, you may have noticed a considerably heavier traffic and longer lines in stores.
These forces have kept the home prices relatively stable.
Now, again, I don’t have a crystal ball but here is what I think will likely happen in the next few months to a couple of years. If the rate of inflation declines further, the nominal interest rates (the interest rates that consumers actually see) will go down with it. Furthermore, with the economy facing headwinds, the real interest rates will begin to fall too. This will revitalize both sides of the housing market. Home buyers will regain some confidence in their ability to afford a mortgage. And home sellers, who put their upsize, downsize or move closer to work or school plans on hold, will begin listing their current homes for sale. However, nearly all home sellers are also home buyers, therefore a drop in the interest rates will lift the demand more than the supply, leading to price growth in the housing market.
Days on Market is still very low. As I’ve said before, Days on Market is naturally biased downward for the latest weeks initially because the newest listings that are destined to sit on the market for a long time, haven’t yet had the chance to do so. Still, Days on Market is quite low, which corroborates my story above: the housing supply is very tight indeed.
Percent of homes selling above List is way lower than the pandemic highs but at 11% it’s higher than the pre-pandemic average.
A similar story is offered by the next indicator, the percent of listings that had to lower their prices. It’s above the pandemic lows but considerably lower than the historic normal of low- to mid-40s.
Percent of homes sold for cash is elevated at nearly 10 percentage points higher than the long-term normal range. Of course, that was expected, with mortgage rates as high as they currently are.
That’s all I had for this month’s housing market briefing. See you next month!