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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Submitted by an on June 27, 2022 - 2:35pm.

wawawa wrote:
Prices will give in.
In my neighborhood, zip 92129, a house went to market 4 weeks ago for $1.2M, sold for $1.0M.

What would that house sell for a year ago? Is it an increase Y-o-Y or has it gone flat? Is that a 20% price drop or was the $1.2m a wishful price?

Submitted by sdrealtor on June 27, 2022 - 7:59pm.

My guess would be it sold for about what it would have sold for last year +/- a little. The owner was impatient and wanted a quick deal. Possibly to cash investor with 2 week close. Givee me address and I can research.

Generally speaking homes arent selling at that kind of discount but there are always outliers. You see them in MM from time to time

Submitted by Escoguy on June 28, 2022 - 2:53pm.

I'm seeing several examples in 92027/92127 where the most recent listing price from May was overinflaated even given the rise of the past 12 months.

Then a cut occurs but it the house is still +20% over last year.

So for now, I'm mostly seeing cuts of wish prices.

In 92078, one neighborhood I watch has what I would consider a "real" cut vs last years very inflated but still closer to a fair value price.

As so often is the case, "it's complicated".

Submitted by sdrealtor on June 28, 2022 - 3:18pm.

Still early. We should see occasional relenters on price but we’ll see as many or more who will just pull it off the market. I just checked my area and saw about a dozen many of which were rentals get pulled off and re-rented. No doubt we are seeing increasing softness but as you said what that means and how things play out is still tbd

Submitted by gzz on June 29, 2022 - 8:25am.

Esco, that matches my observation too.

Prices rose so quickly it became very hard to price at fair market value.

I think periods of rapid appreciation also create greater submarket divergence in appreciation, both within and between neighborhoods.

Prices are way down in SF city and NYC, and to a lesser extent their suburbs. I certainly don’t dismiss a decline here, but I think we lack the outmigration of high income people unhappy with growing urban crime and general disorder, and who now have the ability to WFH in less crowded areas.

The stats on Manhattan are mind boggling, less than 10% of office workers are back to M-F in office schedules. One reason I short BXP.

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