Big awakening or change of logic?

The housing market kept its head down, remained calm and carried on despite the biggest rate hike since the 1980s. The ability to ignore higher interest rates is nothing new for home sales. houses. In fact, sometimes we see almost no reaction in the sales numbers when rates go up.

The following chart shows several of the biggest rate hikes of the past decade (and yes, they look small compared to 2022). While there may be a slight impact on new home sales, it is minimal at best. Maybe house price stability has something to do with it, or maybe those rate spikes weren’t big enough to have a major impact on their respective pricing environments. Perhaps sales were simply still experiencing a rebound effect from the housing crisis.

Whatever explains resilience in the past, something new is clearly happening right now. Plus, it happens FAST. Just last month, new home sales were still at 763,000, a level not seen between the housing crisis and the pandemic. Now, in today’s new numbers from the Census Bureau, new home sales have fallen to lows seen only a few times in the 3 years before the pandemic.

Let’s not complicate things too much: whether it’s new or existing homes, prices have jumped at the fastest pace ever.

This happened despite wages growing far from the same pace.

But did it also happen despite the rise in rates? That’s a much better question. To some extent, the housing supply and demand environment has shielded house prices from higher costs (whether these costs are due to higher prices or higher rates). To a probably greater extent, we simply haven’t seen enough time for the effects of rising costs to trickle down to demand. After all, rates didn’t really start to skyrocket until the majority of recent house price increases were in place.

We have never seen tariffs of this magnitude that BEGINS AFTER prices have already increased by more than 30% over 2 years. The juxtaposition of these two facts helps us greatly to reconcile the drop in new home sales. Some might say that inventory issues explain even more of the decline, but that argument is more valid when looking at the existing home market. New home inventory, on the other hand, is quite different. After April’s sales plunge, inventory levels are the highest in years.

So inventory is no longer a problem for home sales? Uh… not so fast. There is a big difference between new and existing homes. New Homes did all the heavy lifting on the inventory front after the pandemic hit. Existing homes have continued to languish (and the most recent rise is merely seasonal, for what it’s worth).

There are several reasons for this. The price is one.

The other is the sheer scope of the market for existing homes versus new homes. And therein lies the greatest counterpoint to all of the above. In terms of sales and inventory in the housing market, it would be an understatement to say that existing homes do the heavy lifting.

All this to say that the housing market hasn’t exactly turned on a dime to the extent suggested by today’s new home sales data. Yes, sales are down, but that’s a logical consequence of affordability issues created by an unprecedented simultaneous spike in prices and tariffs. Housing overheated. Cooling is welcome. Examining and quantifying this cooling will be more interesting and meaningful in the months ahead as house price data increasingly catches up with supply/demand/affordability data.