San Diego Housing Market News and Analysis
May housing data: something's got to give
Submitted by Rich Toscano on June 20, 2022 - 10:01am
Prices were down a (very) wee bit last month:
Inventory started to build:
Pending sales hung in there from the prior month, but are still lower than a couple months ago. It's probably the case that many people going pending last month still had lower rates locked in.
Putting them together, months of inventory rose quite a lot in percent terms, but that's coming off a very low base.
This longer-term chart of months of inventory puts the increase in perspective:
So we're still at very low inventory levels that have historically implied higher near-term prices. I continue to question whether that can be sustained. Here is the absolutely nutty rise in monthly payments over the past year:
Just think about this. A year ago, people were already stretching to buy houses here. Just 12 months later, for any given house, the monthly payment required to buy it has gone up 65%! Or 52% in inflation adjusted terms... assuming the buyer's income kept up with inflation (which, on average, is not the case).
These are just astounding numbers and it's hard to see how this doesn't seriously impact demand at this price level, once the higher rates are fully priced in (rate locks expired etc).
Zooming out, the inflation-adjusted monthly payment is now comfortably above the bubble peak:
Meanwhile the Federal Reserve appears to be actively targeting a decline in home prices (or at least valuations). Here's Jay Powell from last week's press conference, emphasis mine:
“I would say if you’re a homebuyer, or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together. And where inflation is down low again and mortgage rates are low again. So this will be a process whereby ideally we do our work in a way that the housing market settles in a new place and housing availability and credit availability are at appropriate levels.”
In all, my view is that something probably has to give here: if rates don't come down, valuations likely will. (Or some combination of the two).
If that forecast is right, it still leaves open a lot of questions: Will it be rates, valuations, or both? If valuations decline, how much of that will be from nominal price declines vs. incomes catching up to prices? Over what timeline will this all happen? Etc. I don't pretend to know the answer to any of these. But I do have a pretty strong feeling that this current combination of valuations and mortgage rates cannot be sustained.
Assorted graphs below.
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