Monthly housing data: no inventory, prices up, rates up, affordability horrendous

Submitted by Rich Toscano on April 14, 2022 - 1:57pm

As of March, there was still nothing for sale. In fact we hit an all-time (in my data) low in months of inventory:



Prices rose accordingly:







Speaking of things going up really fast -- 30 year mortgage rates just hit 5%. This was at 2.9% 6 months ago! This is a violent move, and because it started from such a low level, has a major impact on monthly payments. I've made a couple charts to try to visualize this impact.

First, here is the year-over-year change in the monthly payment (nominal and inflation-adjusted) on a San Diego home going back about 15 years.



You can see that affordability has taken a massive hit -- even adjusting for inflation, monthly payments are up over 40% over the past year.

There is a seemingly comforting aspect to this chart, though: we experienced a similar rate of change back in 2013, and things were fine after that. This next chart illustrates the problem with that idea. It shows the total change in the San Diego monthly payment since November 2005 (the month the SD Case-Shiller index peaked). At the time that the 2013 surge began, monthly payments were down almost 60% from the bubble peak, in real terms. They had plenty of room to go up while still keeping affordability pretty decent.



This time around, the surge began from a much higher valuation level, so that the inflation-adjusted monthly payment is now where it was at the peak of the housing bubble!

This is not good or healthy. For years I've been saying that while purchase prices were high, low mortgage rates were keeping payments affordable, so perhaps the high valuations were sustainable. Well, the bond market has just spinning roundhouse kicked the legs out from under that argument. Without the "but muh low monthly payments" rationale, the housing market looks a lot more vulnerable to less-than-perfect conditions (to my rheumy, jaded eyes anyway).

I suspect some people are reading this and thinking, "Look at how little inventory there is -- it shows that demand greatly outstrips supply. So what's the problem? Everything is fine."

Well, you could have said that exact same thing in the spring of 2004. (And many did). But what was happening at that time was a short-term mismatch of supply and demand, which people misinterpreted as meaning that no price was too high. But when the drivers of that short-term mismatch went away, valuations dropped back to earth.

I'm definitely not saying that this is the same situation as the bubble (see last year's housing deep dive for more on that topic). My point is that short-term supply-vs-demand, while a great predictor of short-term price changes, doesn't tell you much about the long-term sustainable price level.

(This seems as good a time as any to mention that San Diego's population has declined for the past 3 years in a row. Yes, I know wealthy Bay Area people are moving here and I agree that's a positive for home prices. But that's not the only piece in this puzzle.)

So while the market is woefully undersupplied for the time being, it's also priced for perfection. And because perfection rarely lasts, I have my doubts about the sustainability of this situation. My guess is that if rates don't come down, valuations will have to adjust.

Some more charts below...

* Valuations, as a reminder, can decline due to fundamentals (rents and incomes, in this case) rising faster than prices, or prices declining, or some combination of the two.

** Chart note 1: as in my valuation graphs, for the latest month's data point I used the most up-to-date interest rate, as rates have changed quickly and the latest figure gives the most accurate idea of what current buyers are facing.

*** Chart note 2: Bill McBride recently put out a chart of the y-o-y change to nationwdie monthly payments, but I swear, I was already planning on doing this chart! :-) I'm not stealing your ideas Bill! Well, some of them, but not this particular one. BTW Bill is a must-read for if you care about the housing market.




















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Submitted by sdrealtor on April 19, 2022 - 9:54pm.

DaCounselor wrote:
Rich re: the foreclosure impact my simple mind would back up a step and ask why do foreclosures occur? Owners either can't or won't service the debt? Why can't they? Or why won't they?

Also, as a corollary, I could be way off here but I thought alot of longer tenured HO's with nice equity cushions got stung last time around due to excessive equity withdrawals. Didn't MEW spike massively last year?

The consumer/investor market cycle tends to play out generally the same way in my experience. Where we're at is anyone's guess but the air feels awfully thin to me.

I dont disagree it feels thin but we are somewhere we have not been under entirely different circumstances.

Here is some info on MEW.

https://calculatedrisk.substack.com/p/th...

Cliff Notes version is big spike last year though still well below 07 bubble amounts with a highly devalued currency and much higher homeowner equity amounts.

Unlike the bubble I would expect a lot more went to home improvement with people sheltering in place. Last time a much higher percentage went to RV's, plastic surgery, vegas trips, expensive cars (which are hard to buy as they are backordered), jetskis, vacations etc. With rates up we'll see a lot less of this in 2022. I dont think we are in anything close to overleveraged bubble era.

To answer your question as to why owners cant or wont service debt? Having spoken with hundreds of them last time around it was because they were so far underwater due to 100% financing they saw no point in doing so. That also is not the case today and is far less likely with huge gains coupled with no more zero down loans

End of the day we are in unchartered territorry and I dont beleive we are in anything close to last time around.

Submitted by DaCounselor on April 20, 2022 - 4:50pm.

Thanks sdr great link.

I don't know what the average current post-MEW LTV average is in SD but i definitely agree that with the massive price spikes it does seem pretty doubtful that we're anywhere close to the prior bubble's over-leveraged market.

I suppose an inability to service debt is independent from LTV considerations, so that some combination of recession/job loss/wage destruction and broader market inflation could put owners in payment distress regardless of the level of equity. We wouldn't see foreclosures but instead forced sales I guess? This could go to Rich's question regarding prices drops without foreclosure waves.

The last go around I had a few friends who went the foreclosure or short sale route in connection with relocating out of SD. They were upside down and would have been cash-low negative on a rental so why take the loss. If they would have been cash flow positive, i assume they would have held the homes as rentals. I have alot of friends who were upside down on their primary and rode it out as the payments weren't an issue.

At the moment it doesn't even feel that prices have peaked yet given what i'm seeing.

Submitted by Pbranding on April 20, 2022 - 6:28pm.

I follow Poway and Scripps Ranch regularly and I’m seeing a lot more price reductions and homes that were pending falling out of escrow and going back on the market so that does seem to indicate some sort of shift away from the absolute power sellers have had so far.

Submitted by phaster on April 22, 2022 - 7:06am.

the POST had an interesting article w/ nation wide data

Rents are rising everywhere. See how much prices are up in your area

How rent has changed in 1,500 counties across the United States since the start of the pandemic

https://www.washingtonpost.com/business/...

Submitted by sdrealtor on May 10, 2022 - 10:09pm.

The top 25 most overvalued markets per Moodys. Of note not one in California or along the East Coast and pretty much constrained to what are considered red states. Did folks fleeing the liberal blue states for red states more in line with their politics set them selves up for financial ruin? Another thing that will be interesting to watch

https://www.fox29.com/news/us-housing-pr...

Submitted by an on May 11, 2022 - 7:42am.

sdrealtor wrote:
The top 25 most overvalued markets per Moodys. Of note not one in California or along the East Coast and pretty much constrained to what are considered red states. Did folks fleeing the liberal blue states for red states more in line with their politics set them selves up for financial ruin? Another thing that will be interesting to watch

https://www.fox29.com/news/us-housing-prices-top-25-most-overvalued-markets-2022-report?utm_campaign=trueanthem&utm_medium=trueanthem&utm_source=facebook&fbclid=IwAR1pdt6kLJoIQ6HHkVOnJaef4woB9AG3BEaYAqiaZ6cIMLc9aoOBTXHB2Mk#l3149eozb4op545i1to


I guess it depends on when you moved. If you were ahead of the herd and bought a few houses when you move, you could be sitting very happy today.

Submitted by sdrealtor on May 11, 2022 - 8:31am.

Yeah I was just being a little facetious and I’m sure most of them should be fine. After all they’re sitting on the biggest gains in many cases and they also brought their “California equity” with them. But you look at those areas and you see places that have run up an interest rates being low without the accompanying high paying job growth. At some point those areas should and will get hit a little harder. When they do I think they just might feel a little nostalgic for the California Equity they left behind and it’s relative invincibility

Submitted by Mark Holmes on May 15, 2022 - 11:07am.

Lots of whistling past the graveyard here imho. Many thanks to Rich; it was this site that helped us time our 2012 purchase of our little house near SDSU for 352K. Everything in our neighborhood now is going for a million or more. That fact alone convinces me that we're about to see another drop of 20%-40%, as part of a national collapse in stocks, commercial and residential real estate and of course crypto and NFTs. Those last items I see as dropping 90%-95%, since they have no underlying real value.
I easily could be wrong. But history is riddled with bubbles that are exacerbated by times of lax regulation, which we've been in since the late 90s. We are way overdue for another collapse. Just going with my gut here, of course. Not a finance guy at all; don't even have a 401K. But we haven't touched our "equity" for a reason. Watching, and benefiting from, the last collapse only convinces me that a big shock is coming.
Just a thought.

Submitted by sdrealtor on May 16, 2022 - 8:09pm.

Mark Holmes wrote:
Lots of whistling past the graveyard here imho. Many thanks to Rich; it was this site that helped us time our 2012 purchase of our little house near SDSU for 352K. Everything in our neighborhood now is going for a million or more. That fact alone convinces me that we're about to see another drop of 20%-40%, as part of a national collapse in stocks, commercial and residential real estate and of course crypto and NFTs. Those last items I see as dropping 90%-95%, since they have no underlying real value.
I easily could be wrong. But history is riddled with bubbles that are exacerbated by times of lax regulation, which we've been in since the late 90s. We are way overdue for another collapse. Just going with my gut here, of course. Not a finance guy at all; don't even have a 401K. But we haven't touched our "equity" for a reason. Watching, and benefiting from, the last collapse only convinces me that a big shock is coming.
Just a thought.

So you are gonna sell? If you are convinced your house is gonna drop 200 to 400K why wouldnt you? Thats the 401K you dont have

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