First, today’s existing-home sales report continues the string of beating my estimates and showing the power of lower mortgage rates to recover sales from the January low print of 4,930,000. Now it is true that sales are negative year-to-date but barely. They’re trending higher than my peak sales range for the year. So, the 2019 existing home sales marketplace has been outperforming now with the year to date sales.
In 2018, I wrote:
“I am looking for sales to trend flat to negative between 4.92- 5.29 million with slightly more inventory in 2019, but not a dramatic difference.”
Today sales are trending at 5,322,727. Also, as demand has gotten better, the year over year increases in inventory, which has been prevalent for some time now, have gone away.
Total existing-home sales1, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums, and co-ops, decreased 1.7% from October to a seasonally-adjusted annual rate of 5.35 million in November. However, sales are up 2.7% from a year ago (5.21 million in November 2018). Lawrence Yun, NAR’s chief economist, said the decline in sales for November is not a cause for worry. “Sales will be choppy when inventory levels are low, but the economy is otherwise performing very well with more than 2 million job gains in the past year,” said Yun.
Looking back at this decade and keeping up my (2008-2019) thesis of
“We simply don’t have enough mortgage buyers, once you exclude cash buyers from having a real recovery in housing.”
For the existing home sales market place, this means something entirely different than the new home sales market. This decade I honestly didn’t believe the purchase application index could break over 300 in this index below. This roughly means we are at 1998 levels.
However, after hitting an adjusted to population all-low in 2014, this index started its slow and steady move higher.
In years 2020-2024, as birth rates grow just a tad, we should be able to finally crack that 300 level.
As long as the 10-year yield stays away from 2.62%-3.25%, the demographic push from the most significant demographic patch ever recorded in the U.S. history (Ages 26-32) will provide enough replacement buyers to keep things at bay. Second, the first time homeowners in this cycle have a high-quality loan profile. So, if they need to move up due to kids, school, job loss, job gain, divorce, etc., etc., etc., we have a decent backdrop for that as well.
My big thing for the housing market is that many people just simply don’t need to move. I am not talking about boomers downsizing. I am talking about families who bought their first 1,800 -2,600 sq ft home, not having an incentive to move to a bigger house.
We have been building bigger and bigger homes for decades now as family sizes have been getting smaller.
The builders to their credit saw this and have tried to bring smaller homes into the mix. However, you simply can’t just turn a colossal ship fast.
Selling equity, specially adjusted to inflation, still continues to hold some potential move-up buyers back. Conservatively if you want to use the affordability index, a homeowner would need at least 28%-33% nested equity built up to sell, pay the transaction cost and move with a decent down payment for a big home.
Another thesis I am not a big fan of is the rate lockdown thesis. This working thesis has been that Americans are sitting at home.
– They need to move
– They have the financial capacity to move
– As soon as rates come down, they will provide the supply
This has been probably the most frustrating story to watch, be told. The 10-year yield has been in the channel between 1.60% -3% for the majority of the time in this record expansion, and every time yields fall, demand gets better, and inventory levels fall with that. Enough said!
Remember, the best existing home sales report came in November of 2017 when Inventory levels hit a cycle low.
Looking back in the last 20 years, if you just took away the housing bubble demand years and crash years away and smooth it out, housing looks just about right. The existing home sales cycle looks reasonable to me. However, the one thing that I did get wrong is that cash buyers as a % of sales have stayed much higher than I thought it would. For many years I was looking for this data to fall to about 16%-19% of sales on-trend, and it held up higher for longer. Only this year did we see many teenager prints. Going out if cash buyers as a % of sales do fall back to their historical norm of 10%, then we just simply need more mortgage buyers to offset that loss and grow. This is one factor in why we haven’t seen growth in 2019.
More of the last decade here:
A Look Back At The Decade Of Housing Starts
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.