There is a feeling of Halloween in the real estate world because this housing market is a bit scary these days. At least that’s what some economists have expressed.
The market is spooking many potential buyers and sellers thanks to stubbornly high mortgage interest rates. The inability to loosen rates – and therefore reduce monthly payments on future home purchases – has put a stranglehold on sales activity. Only buyers and sellers who must move are doing so.
Despite the “haunted house” vibe, prices are rising again and homes are only on the market for about a week across King County. What in the “pumpkin spiced latte” is going on here?!
“The number of shoppers out there is lower than there were over the last couple of years – but [the housing] supply has come down even more. It’s making the market feel hotter than it is,” said Ali Wolf, chief economist of the building consultancy Zonda. “The few homes that are available are selling quickly and at or above list price.”
August’s figures in King County were in a narrowly mixed range compared with July. While there were 5.8% fewer new listings, the rate of sales rose 1.7% against the previous month. Prices were slightly higher in most parts of the county over the month.
Two data points stood out from the latest report by the Northwest Multiple Listing Service:
- The aforementioned new listings for all homes in the county – 2684 – is at a low not seen for an August since records were shared with brokers (like me) dating back to the mid-1990s.
- The number of homes going under contract – known in the industry as Pending sales – fell to 2340, an August figure not seen in King since 2010 when there were only 1580 in the heart of the housing crisis.
Scary, indeed, but are these signs of a pending housing recession? Unlikely.
“I would call it ‘housing purgatory’ rather than housing recession,” says Marci Rossell, noted U.S. economist (and one of my go-to sources). “We’re just trapped in this equilibrium of low inventory, house prices not coming down, high mortgage rates and current owners who have a strong incentive to just sort of stay where they are and wait this out.”
The single-family-housing market is also limping along. There are 7.4% fewer new listings (1998) compared to July and 5.0% fewer Pending sales (1734). Sales inched 1.0% higher (1656) but these are typically on homes that were first listed in June and went Pending in July – a period when activity was slightly more brisk than today.
That is not to say the market is at a standstill. The median timeframe of homes on the market – a measure of sales intensity – is 6 days for single-family houses, unchanged for 3 consecutive months, and 9 days for condos, unchanged for 2 months. This suggests homes – while far fewer for sale than in recent years – are quickly being scooped up by those few available buyers.
Single-family homes were selling across King at a median price of $906,250; that’s up 1.0% from July and up a mere 0.7% from a year ago. Seattle prices were statistically unchanged ($899,000) from July and off 3.0% year-on-year (YoY). Southwest King County, which includes Des Moines and Federal Way, saw a 9.1% ($600,000) month-to-month drop but prices are unchanged over the last 12 months. Median prices fell 3.1% ($1.43M) on the Eastside since July but are up 7.6% YoY.
Condo prices rose 2.9% ($525,000) across the county in August, including up 4.5% ($575,000) in Seattle. They were effectively flat ($600,475) on the Eastside.
Inventory was little changed from July to August. It remained at 1.5 months in King for all homes – single-family, townhomes and condos combined – on the market. The Eastside has 1.3 months’ inventory, down from 1.5 in July, and Seattle saw it fall to 1.8 months from 1.9. Single-family-home inventory was unchanged at 1.4 months in the county, including 1.3 on the Eastside and 1.5 in Seattle. Condo inventory stayed at 1.8 months across the county; notably, it jumped to 5.0 months for downtown/Belltown, from 4.4 in July, making that area a buyer’s market again.
King County experienced a 2.0% median price month-to-month increase on all home types, to $821,000. Elsewhere, Snohomish County saw prices decline 2.5% ($700,000) since July after a 4.3% drop the month before – heading toward market-correction territory. Meantime, prices were rising in Pierce by 1.8% ($539,425) month to month and 4.3% ($558,500) in Kitsap. Single-family home prices in King added 1.0% in a month ($906,250), but Snohomish fell 2.8% ($730,563) on top of the 3.1% drop in July. Prices rose 1.7% ($549,950) in Pierce and 3.7% ($564,947) in Kitsap. Year-to-year, single-family median prices were mixed, up 0.7% in King, down 2.6% in Snohomish, down 0.9% in Pierce and up 2.7% in Kitsap.
Bigger Picture
The U.S. is on target to sell only 4.1M homes this year, below expectations and a figure not seen since 2008 in the heart of the housing crash. Americans bought 6.1M homes in 2021, for comparison. And, no, we are not heading for another housing crash. (We’ve covered that topic before.)
Why are we in this situation? It starts with pandemic-related supply issues that prompted skyrocketing prices for everything from eggs to gas, airfare to, ahem, homes.
Econ 101: The standard measure of inflation in the U.S. is the Consumer Price Index (CPI), which tracks price changes on a basket of goods and services, including food, shelter, energy and health care. And board members at the Federal Reserve watch that figure closely (among many other indicators) to determine what levers to pull to keep inflation in check.
The Fed forecasts shelter costs (rental rates, owners’ equivalent rent + related items) will drop below 5% by November and go negative next spring. Why is this important? Because the shelter component in CPI (35% weighting in headline CPI) has been the biggest driver of inflation over the last year. Once that falls, the rest of the CPI index should drop as well and improve the overall economic picture – presumably music to the Fed’s ears.
Of course, that assumes there are no other surprises along the way to push us toward a recession. Many economists believe a recession isn’t likely in the last months of this year but they aren’t ruling out a downturn in 2024 and 2025. The impact of the Fed’s 11 interest rate hikes is still working its way through the economy.
“The prevailing sentiment is that we’re living through a soft landing [but] I don’t think we have enough evidence to support that yet,” said Wolf, from Zonda. “There’s still a reasonable risk that we’re going to see job losses toward the end of this year or early next year. An economic recession increases [the likelihood] that you see [home] prices come down a bit, but it doesn’t guarantee that prices come down.”
Mortgage Rates
Some Fed members have recently advocated for no further rate increases of the central bank’s Federal funds rate – the interest charged when banks lend money to each other. The higher the rate, the better the chances of increased financing costs on everything from credit card debt to car loans and, indirectly, mortgages. (Investors of mortgage-backed securities guide that rate discussion and they can be influenced by the overall financing world.)
What a difference two decades make! Home prices have shot up 235% since we last experienced mortgage rates at this level, crushing the American dream of owning a home for many. Also, the rates then were on their way down from 9.0%.
Of course, rates are nowhere near their levels from my childhood – the 1980s – when they ranged between 9% and 14%, reaching a plateau of 18.1% in 1981. (I know, I know: That was an “okay, Boomer” moment. My bad!)
Continued high rates today will prolong affordability challenges, particularly with home prices on the rise again. The average monthly principal and interest payment for buyers financing a 30-year loan in July was $2306 nationwide; that’s the highest average on record and it’s likely to trend higher, according to Black Knight Mortgage Monitor. On the flip side, having fewer buyers looking has made it an opportune time to purchase for some.
Another sign of the times: fewer mortgage applications. They’re at levels not seen in the 21st century. According to the Mortgage Bankers Association (MBA), the number of applications for new purchase mortgages in late August fell 30% YoY to the lowest mark since 1995. As the number of buyers with mortgage financing diminish, the ratio of all-cash purchasers has risen to 30%, according to the National Association of Realtors®.
A revised forecast from the MBA issued last month expects a mild recession in the first half of 2024, which it believes will result in unemployment increasing to 4.9% by the middle of next year from 3.8% today. The MBA forecasts mortgage rates to decline gradually at the end of 2023 to 6.2% and 5.0% by the end of 2024.
Thanks to mostly favorable economic news since last month’s housing market blog post, financial experts are putting a 93% probability against the Fed raising short-term rates when they meet on Sept. 20. So, yes, there’s still a chance – albeit slim – of rate increases.
New Construction
The new home construction sector has taken much of the residential spotlight this year. Every month, the number of permits authorized to erect new single-family homes has gone up. That trend will likely reverse course if rates to finance construction projects remain at high levels or rise further.
The new home market was 31% of the total U.S. for-sale inventory at the end of Q2. Just 19% of inventory in Seattle metro is new construction and that’s up from 13% a year ago, according to a report in Puget Sound Business Journal.
Newly built homes sat on the market for about 6 weeks last fall, the shortest median length of time for that segment of inventory since the measure was first recorded in 1975, according to HousingWire. So far this year, the median time on market for new homes has been even lower, dropping every month, including only 2.3 months in July (latest data) as popularity grows.
Consumers are finding more selection among new construction projects – mostly single-family houses and townhomes. Demand should remain strong as developers work hard to create additional supply.
U.S. housing starts, which include multifamily dwellings, continue to defy dire forecasts of an economic recession. They rose 3.9% month over month in July and 5.9% YoY to 1.45M units. Single-family homes were built at a seasonally adjusted annual rate of 983K units, up 6.7% from June and 9.5% from a year ago. Unfortunately, the Census Bureau reports households are being formed at a faster rate – about 2M a year – worsening the housing shortage.
Meanwhile, single-family permits, the step before housing starts and a leading indicator of future new-home supply, rose 0.6% from June to July and 1.3% YoY to 924K units, while single-family completions rose 1.3% month over month and 1.4% YoY to an annual rate of 1.01M.
Commercial Real Estate
Many economists are worried that real estate could once again cause problems for the economy. This time, however, they’re focused on the commercial side rather than residential.
There are concerns that commercial landlords of offices, apartments and other buildings could default on their loans in the coming years. These loans tend to be much shorter than a 30-year mortgage on a home. Many are interest-only loans and come with a balloon payment at the end of their term.
Owners typically try to refinance their debt before they have the large payment due but interest rates are much higher than they were just a few years ago. Those higher rates are saddling owners with bigger mortgage obligations at a time when they can’t just raise rents enough to make up the difference.
Commercial real estate owners have roughly $1.4T in debt maturing over the next 3 years, according to Cushman & Wakefield, a global real estate firm. Cushman reports some 1B (yes, with a “B”) sq. ft. of office space could be vacant by 2030, or nearly 1.5 times more than at the end of 2019.