Home Price Growth Will Cool Down




Yesterday listening to a first-time homebuyer on a Clubhouse discussion about housing, I could hear the pain in the voice. It’s one thing to get outbid by one buyer, but it’s another thing to get outbid by 11. To state the obvious housing demand is fine, we have the best housing demographic patch ever recorded in U.S. history, running along with the lowest mortgage rates recorded in history. These two things won’t change. As I have stressed repeatedly, it’s rare post-1996 to have any existing home sales print under 4,000,000. Excluding one-time events like the Covid19 one-month extreme sales decline and the aftermath of the first-time home buyer tax credit gimmick in 2010. The only time this has happened was in 2008. This runs into my weaker demographic patch thesis, which started in 2008, credit got tight as it should have, and we were entering the recession. Things are much different now in the years 2020-2024. Mother Demographics is a powerful economic force.



Housing is the cost of shelter to your own capacity to own the debt, it’s not an investment, and this isn’t driven by Blackrock, real estate investors, or cash buyers. We have the best housing demographics ever in history folks, don’t overthink this.

Instead of using the term boom, I love the term replacement buyers in the years 2020-2024. It should relay that the conspiracy theory housing crash people don’t have the training to talk about housing economics. With that said, let’s look at demand.

First, sticking with the theme that all housing data will moderate from this parabolic move we saw in the second half of 2020. This has nothing to do with demand but just a function of how Covid19 has messed up the data lines. As I have stressed since last summer, we should see existing-home sales get back to 6,200,000 or lower. The action recently by all housing data looks normal to me, and we are getting closer to a real demand trend to work off, not there yet. 



From AdvisorPerspective:
https://www.advisorperspectives.com/dshort/updates/2021/03/22/existing-home-sales-down-7-in-february



I talked about some levels with the recent pending home sales data that people should keep an eye out for the rest of 2021.

https://loganmohtashami.com/2021/03/31/pending-home-sales-look-just-right/

The best indicator of how the year is going has always been the MBA purchase application data. This data also has been hit with the Covid19 data bug because it’s pretty wild. Let’s take a look at the year-over-year data. The last 4 weeks should be ignored because they’re working from Covid19 comps, hence my #IgnoreAllYearOverYearData. In fact, if we had normal comps, today’s MBA data would be slightly negative year over year today.

Starting from the most recent to the the start of the year. Today we saw 51% year over year growth.

+51%
+51%
+39%
+26%


Covid19 comps ignore and know it will be negative year over year in the 2nd half of 2021.

This is my take on the reason why we saw double-digit year-over-year growth earlier this year. One thing that happened last year is that existing home sales never got back to 5,710,000 – 5,840,000. This was the level I had been talking about last year that should be the target due to how February, 2020 sales were going. Because we ended the year at only 5,640,000 total existing-home sales, I left the opening that we could see makeup demand early in 2021. 

+5%
+2%
+1%
+7%
+15%
+17%
+16%
+16%
+15%
+10%

+3%

From CalculatedRisk:
https://www.calculatedriskblog.com/2021/04/mba-mortgage-applications-decrease-in_0188813168.html




Housing demand is fine, but I wouldn’t call this booming demand as we saw during the bubble years because lending standards are normal. Housing has limits, just like how it can’t really crash in demand with demographics and low mortgage rates. It also can’t be booming either. This is why I look at the years 2020-2024 like this. As long as total home sales, both new and existing home sales together are 6,200,000 and higher, then look at this data line as a beat. This could not happen from the years 2008-2019, but it should be for the years 2020-2024. 

Home prices are well above my yearly nominal comfort level of nominal home price growth of 4.6%. This has more to do with inventory collapsing.

Somewhat similar to what we saw in 2013 as home prices accelerated, but higher rates did cool things down. In time, with higher mortgage rates, this should be the case. Don’t make this into some pathetic trolling terrible YouTube housing is going to crash thesis. For the sake of humanity, these people had the biggest whiff ever recorded in U.S. history to go from a bubble crash to the most outperforming sector in the world means you have no understanding of Demographics and mortgage rates. We have built-in demographic replacement demand, and rates are too low to have sales collapse well below 4,000,000. Remember the housing bubble years peaked over 7,000,000 to below 4,000,000. We ended 2020 with just 5,640,000 total existing home sales.

Be the detective not the troll!

With that said, a housing rate of growth price cooldown is exactly what we need, and higher rates should do the trick. This should create longer days on the market. Also, we are working from some extreme levels, so it won’t take much to move the needle. For Housing Wire, I discussed this and some ideas people brought on what the government can do to help. 

https://www.housingwire.com/articles/should-government-step-in-to-create-more-housing-supply/

Think back to 2013/2014. The rate of growth cooldown, home sales didn’t crash, home prices didn’t go negative year over year. Total inventory was much higher back then, and demand was lighter back then too. However, the market took a breather. This would be the number 1 most bullish thing we can have in housing. As I talked about last summer, 3.75% mortgage rates and higher should do the trick. Even rates rising above 3% can create a fractional cooling down because of how fast home prices have risen. Just don’t spaz out when this happens; it’s a positive thing. We need balance, and we don’t have it here as this is the unhealthiest housing market in the last 10 years.

From AdvisorPerspectives:
https://www.advisorperspectives.com/dshort/updates/2021/03/30/january-s-p-case-shiller-home-price-index-national-index-up-11-2-yoy-nsa




Logan Mohtashami is a Lead Analyst for Housing Wire, financial writer, and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami, now retired, was a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987.