State of U.S. Housing – Yet Another Hurdle

Admir Kolaj, Economist | 416-944-6318

Date Published: October 16, 2023


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  • Mortgage rates have continued to creep higher in recent weeks, rising to the highest level in 23 years. We expect the move to put further pressure on affordability and spur another leg down in existing home sales.  
  • High interest rates will also continue to discourage existing owners from listing their homes as per the mortgage rate lock-in effect. But, with demand taking a hit and the labor market expected to loosen somewhat over time, motivated sellers may need to recalibrate their price expectations.  
  • The lack of supply in the existing home market had, until recently, provided some support for the “new” home market. However, this sector too won’t escape unscathed, with early indications showing it is also feeling the sting of higher rates.
Chart 1 shows existing single-family home sales per 1000 households, with the data stretching back to the 1960s. The chart shows that sales benchmarked against the number of households have eclipsed the 2010 trough and have fallen to the lowest level since the early 1980s (note that the last data point reflects a forecasted value).

Rates Increase Sharply, Shrinking Pool of Prospective Homebuyers 

Existing home sales have fallen a whopping 36% since the start of 2022 and currently sit at 4.0 million units, a level not seen since the depths of the Global Financial Crisis (GFC). After adjusting for the number of households, today’s sales look even worse, having fallen to a near 40-year low (Chart 1). At this point, there is little in the way of recovery on the horizon. After a brief reprieve late last year and into early-2023, mortgage rates have again shot higher, and now sit at an eye-catching 7.6% as per the Freddie Mac weekly measure (Chart 2). 

At these rates, housing affordability will take another major leg down, and is likely to hit a new post-1984 low (Chart 3). This will further diminish on an already limited pool of buyers and keep market inventory drum tight as would-be sellers are likely to remain on the sidelines until there’s some reprieve on the rate front. Home sales activity will take a hit. Recent readings on leading indicators corroborate this view. Pending home sales fell 7.1% month-over-month (m/m) in August – bringing the index to a new all-time low – while mortgage purchase applications have fallen to the lowest level since 1995. This suggests that existing home sales are likely to soon dip below the 4.0 million threshold and test new post-2010 lows over the coming months (Chart 4). Note that even prior to the latest backup in rates, we had seen evidence of buyers pulling out of the market, with the share of deals falling through increasing to almost 16% in August – the highest level in nearly a year (see Redfin data). 

It’s worth noting that the dynamics between the 2010 trough in sales and the current low are very different. Back then, mortgage rates were well off pre-GFC levels (from a little over 6% to 4.5%), while the number of existing homes for sale sat at a more abundant 3.5 million (or 11 months’ worth of inventory). This time around, the resale market has been hit with dual headwinds of a sharp increase in mortgage rates and very thin inventories (around 1 million or just 3 months of inventory), keeping sales at multiyear lows (Chart 5). 

Chart 2 shows the 30-year fixed mortgage rate per the Freddie Mac weekly measure. The chart shows that rates have been on the rise again over the last several months, increasing to 7.6% last week – the highest level since December 2000. Chart 3 shows the housing affordability index, with the data stretching back to the early 1970s. A higher value in the index points to a more affordable environment, and vice-versa. The last few data points to October 2023 are forecast values. The chart shows that as of the last estimated reading, the housing affordability index has fallen to the lowest level since 1984.
Chart 4 shows month-to-month percent changes in pending and existing home sales, with the data stretching back to early 2022. The chart shows a strong correlation between the two series when changes in pending home sales are shifted forward by one month. Pending sales fell sharply in August, implying that existing home sales are also likely to record a sharp pullback over the near-term. Chart 5 shows the number of existing homes for sale across the United States, both on a seasonally adjusted and non-seasonally adjusted basis. The chart shows that the level of existing housing inventory sits near all-time lows with available data going back to 1999.

The dearth of inventory in the resale market has also been a factor in keeping sustained upward pressure on prices, which has been the other element pressuring affordability. Looking ahead, high interest rates will continue to discourage homeowners from listing properties given that they would face a much higher mortgage rate on their subsequent home purchase. But, with demand taking a hit and the labor market expected to loosen somewhat over time, motivated sellers specifically will likely need to recalibrate their price expectations. All in all, we anticipate a more sluggish price environment may soon follow. Though it’s still early days, the share of listings that have seen a reduction in their asking price has increased to 6.6% over the past month – providing some support to this narrative. Note that this time last year – a period when home prices were falling – the share of listings that had a price drop was slightly lower at 6.4%. 

New Home Market Also Feeling the Sting of Higher Rates

Until recently, increasingly more homebuyers appeared to be moving into the new home market, aided by healthier inventories and builder incentives (Chart 6). But, with mortgage rates pushing significantly higher, the new home sector is also feeling the sting of higher interest rates. Homebuilder confidence has been trending down recently, with builders reporting a pullback in prospective homebuyer traffic and anticipating fewer sales in the months ahead. Additionally, new home sales fell 8.7% in August, more than wiping out the 8% gain in the month prior. This data is inherently volatile, but the moderate pullback on a 3-month moving average (3-mma) basis, signals a potential turning point for the series (Chart 7). Meanwhile, the increase in mortgage rates through early October, suggests this trend is poised to worsen over the near-term.  

Chart 6 show two series – new single-family homes as a percent of total single-family homes (new + existing) that are available for sale, and that have been sold. The chart shows that the share of new single-family homes available for sale has increased from 18% in the pre-pandemic period to 33% as of the latest reading. Amidst this improved availability, the new home market, responsible for roughly 13% single-family home sales in the pre-pandemic period, has been able to grab a slightly bigger 16% share of the sales pie recently. Chart 7 shows new U.S. single-family home sales, along with a smoothed series (3-month moving average) for the same. The chart shows that new single-family homes sales have trended higher since the start of this year, but over the last few months the trend appears to have turned moderately lower.

Digging deeper into the new home market, the previously hot South region appears to be behind the recent softness in sales. Note that while activity has also weakened in the Northeast, this region makes up only around 5% of total new single-family home sales, compared to 56% for the South. Meanwhile, new home inventories have been trending higher, driven (again) by an increase in the South. The latter had much stronger construction activity compared to the rest of the country during the pandemic, thanks in part to an increase in domestic migrants. Population figures for 2023 aren’t due until later this year. However, alternative data sources indicate that while the region continues to attract people from other parts of the country, that inflow may be waning. Apart from the run-up in interest rates, this may be an added factor contributing to less supply being absorbed compared to what builders in the region may have anticipated. 

Having been burnt in the last housing crash, U.S. homebuilders appear to be managing their inventory more carefully in this rising rate environment. This as a growing share of the for-sale inventory is made up of homes where construction has not yet started (Chart 8). In other words, builders appear to be reducing speculative construction, something that would help limit sunk costs if there’s no uptake for inventory that’s already been completed or is under construction.  

The downbeat sentiment among builders is reflected in construction activity, with housing starts taking a step back over the last few months. The decline has been especially sharp in the multifamily segment. The latter is mostly tied to the rental market and already has a very rich supply pipeline, with the number of multifamily units under construction sitting at a record high of one million. Single-family construction has pulled back too, though at a more moderate clip. An increase in housing permits in August pointed to some underlying resilience, but considering how far rates have come recently, this resilience may prove short lived. This brings us to another point. It is important to take stock of the tug of war between cyclical and structural forces at play in residential construction. Cyclically, there’s room for starts to push lower, especially if the latest increase in rates is sustained for some time, or if rates rise further – something that would further crimp affordability and increase the risk of a recession. Structurally, the picture is more positive. Since the GFC, the rate of household formations has generally outperformed the number of new homes coming to market (Chart 9). 

Getting back to the here and now, new home prices are down roughly 7% from their peak at the end of 2022 (on a smoothed, seasonally adjusted basis), and homebuilders have been ebbing and flowing the incentives at their disposal to push inventory along. With conditions in the new home market softening too, builders are expected to make greater use of these incentives over the near-term. 

Chart 8 shows new single-family homes available for sale whose construction has not yet started as a percent of all new single-family homes available for sale. The chart shows that the share has been increasing over the last few months, with homes whose construction has not started making up a little over 24% of available inventory. Chart 9 shows net U.S. household formation and new housing completions per year, with the data stretching back several decades. The chart shows that in the years following the Great Financial Crisis through 2022, household formation generally outpaced housing completions.

Bottom Line

With mortgage rates creeping higher and hovering around 7.6% recently, housing affordability will take a hit and likely fall to a new post-1984 low. This will further reduce the pool of qualified homebuyers and result in another leg down in existing home sales, which we anticipate will soon test new post-2010 lows. The new home market – which, until recently, benefited from the shortage in the existing home market – won’t escape unscathed, with early data showing that it too is beginning to feel the impact of higher rates.