No sector of the U.S. economy affects middle- and working-class Americans more than housing. Most Americans have the majority of their savings and net worth tied up in their homes. Housing is the primary asset that serves as a literal and metaphorical shelter in the storm, a store of value for the future, and as a source of passive income for numerous entrepreneurial “mom and pop” landlords across the country who rent out a single room or an entire house.
The housing markets are in trouble, however, which means that the financial security of many Americans is at risk. Moreover, the turmoil in the housing markets appears to be getting worse.
Mortgage rates have increased by approximately 4 percent since the Federal Reserve’s current rate-hiking cycle began in early 2022, yet at 6.9 percent they still remain below the long-term average of 7.8 percent since 1971. Indeed, in the decade of the 2000s, mortgage rates in the range of 6–8 percent were typical, at least in the years before the global financial crisis of 2008–09. These levels weren’t enough to deter a housing bubble then, nor are they likely sufficient to explain the current weakness we’re seeing in housing now. Yet even though these interest rates are not unprecedented, they are unfamiliar to recent memory, chilling buyer demand.
Rising rates affect home affordability. After a two-year period in which home prices rose more than 40 percent—i.e., since the lockdowns in March 2020 caused everyone to reconsider their living arrangements—rising interest rates are the equivalent of applying the brakes on a runaway train. At the median home price of $400,000, a 4 percent increase in interest rates adds $16,000 in annual homeowner costs. Against U.S. median household income of just over $70,000, this number is significant.
As I wrote for The Epoch Times a couple of weeks ago, it’s not just interest rates that are to blame for declining home affordability. Equally negative has been the stampede into housing by private equity and institutional capital—a combined force which represents powerful new competition for residential housing. The effect of these large and well-capitalized buyers with preferential access to financing has been to push prices above their otherwise normal levels. These unnatural corporate owners of single-family homes, who rent them back at fat margins, reduce supply and increase costs for the Americans who would actually live in them. These same institutional investors have themselves pumped the brakes in recent quarters, representing 17.5 percent market share in the third quarter of 2022 compared with 20.2 percent earlier in the year.
Home sales data reveal the distress and the impact of declining affordability, price inflation, and other factors on aspiring homebuyers.
One of the best forward-looking indicators of the housing market is the National Association of Home Builders/Wells Fargo Housing Market Index This index represents the sentiment of the developers, builders, and other industry insiders who know the housing market best and who have experienced its booms and busts. Tellingly, the index of homebuilder confidence has fallen for 11 straight months, and is now at its lowest level in more than a decade. A combination of factors—including slowing customer demand, declining affordability from rising interest rates, large spikes in prices of concrete, lumber, and other materials, along with tight labor markets—is pressuring the industry.
While nationwide the median home sales price is up nearly 5 percent year over year, this statistic sends a false signal because it likely reflects little more than overall price inflation, which has been well above 6 percent for more than a year. Other indicators signal that housing prices started to soften and even decline since June 2022.
Strength in certain regional markets belies serious weakness elsewhere. Notably, Florida has eight of the top 10, fastest-growing sales price regions in the nation, and five of the top 10 inbound metros (meaning, where people are seeking to move to), masking declines in the Northeast and elsewhere. The exodus continues from cities such as San Francisco, Los Angeles, New York, and Washington D.C., which have more than 100,000 households seeking to leave and looking elsewhere.
However, sales volumes—rather than prices—tell the real story. The number of homes sold has dropped by nearly a third (29.6 percent), and new listings are down 24 percent since last year. The average number of days a home remains listed has increased by 67 percent. Inventories have increased by over one month of supply to nine months, edging closer to the all-time high of 12 months immediately following the global financial crisis in 2009. Housing starts also have been in decline since April 2022.
The housing markets are flashing red as a forewarning to the broader economy. Consumers are nervous, and already struggling to meet rising food and energy costs. Homebuilders are cautious, and want to avoid repeating the mistakes of the last cycle. Housing appears to be the canary in the coal mine, warning of the increasing risk of recession in early 2023.
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