While home sales are down, why are home prices still up?

Looking at the housing market in the years 2020-2024, a risk that I identified early on was that house prices could accelerate more during this period than during the previous expansion if the channels of inventory were at historically low levels.

I talked about having a 23% price growth model for the housing market in the years 2020-2024 as a critical marker of balanced growth versus overheating, especially as stocks have been falling since years in our critical demographic patch. Slow and steady always wins, but sometimes fate gives you a hard time, and there’s not much you can do when the market outweighs anyone’s desire for balance.

Over the last two and a half years of housing in the United States, one thing that will make the record books is that it wasn’t housing deflation we had to worry about, but housing inflation on both sides: prices houses and rents.

After ending 2021 and breaking my price growth pattern after just two years and starting 2022 at historically low inventory levels, I called the US real estate market wildly unhealthy. This problem is very different from the housing credit bubble of 2002-2005. Back then, we had higher sales, higher inventory, and lower price growth, but we had a huge credit bubble. Today we have fewer sales, fewer listings and much higher house price growth.

When I talked about the need for higher rates in February 2021, it was based on the fact that we didn’t have a credit bubble, so the request is legitimate. However, this also means that the application has limits. The reality was that global bond yields were still low, and pushing the US 10-year yield above 1.94% was going to be problematic. When stocks fell again, bidding wars became the norm and house prices soared.

In October 2021, it was clear that stocks had no chance of posting year-over-year growth, and we were heading for an even worse house price growth inflation story in 2022. unless rates go up. The January and February data looked so bad that I threw in the towel and said nothing else mattered at this point – we need rates to rise to try and cool this market.

Mortgage rates of 4% to 5% weren’t doing the amount of demand destruction I thought they would. I was expecting four week moving average declines of 18% to 22% year over year, but we were seeing high single digit and lower double digit declines. Mortgage rates closer to 6% are for sure the source of more significant year-over-year decline data. Still, I never got the 18% to 22% four-week moving average decline I was looking for and the traditional seasonality time is now exceeded for this line of data.

On Wednesday, shopping app data was down 4% week-over-week, 18% year-over-year, and the four-week moving average decline is now down 17.25%. I guess the growth in ARM loans this year has prevented the 18%-22% year-over-year downtrends I was looking for earlier in the year.

By October of this year, year-over-year comparisons will be much more difficult, so we can expect bigger declines if the trend stays the same.

However, mortgage rates hitting 6.25% did indeed accelerate the pace of year-over-year percentage declines in purchase demand data. Nevertheless, here are some examples of why we needed rates to increase. (That’s not normal, folks. You don’t see percentage drops like this with year-over-year price growth in June.)

  • Home sales in Las Vegas were down 24% year over year as the median selling price increased 21% Year after year.
  • Orange County, California, terraced homes in June, sales fell 27.2%, and rising prices 17.8%.



Now imagine how hot house prices would be if mortgage rates didn’t rise above 6% this year and we weren’t hit hard by affordability? The housing market always sees better demand once the 10-year period is below 2% and we have rates below 4%.

Amid the drama of higher rates, my biggest fear is actually if rates go back down. Home sellers and builders had too much pricing power, driving prices to extremes. My five-year growth price model was destroyed in two years, and things got worse in 2022 before rates rose.

Remember that we all want a balanced housing market; it’s a good thing, not a bad thing. So the focus for me lately is to see the total inventory back to 2019 levels. That’ll be positive, and we’re working on it, we just need more time because the 2022 housing market isn’t not the forced credit housing market of 2008. I don’t need the housing market to have 2012, 2014, or 2016 inventory levels to balance – I just need the inventory data of 2019, which are between 1.52-1.93 million houses, using NAR data.

RAN: Total Inventory

Realtor.com and others have data lines that use other inventory metrics. However, they all move in the same direction.

From Altos research:

I recently did a podcast with Mike Simonsen of Altos Research on this topic.

As the economic cycle shows more recessive data lines, traditionally the bond market and mortgage rates fall together.

We got another hot CPI print on Wednesday, and the 10-year yield is trading at 2.93%. That’s not even the peak we had in 2018, when inflation growth was weaker. Many people believe that mortgage rates should be higher today if they kept pace with the growth rate of inflation, which means bond yields should also be much higher. However, since 2021 bond yields have not kept pace with the growth rate of inflation.

From the BLS:

The downside of higher rates
Housing construction will slow

Consistent with my summer 2020 premise that for the market to change it needs a 10 year return above 1.94% and with duration to negatively impact sales. The new home sales sector will slow down as always. Even in March of this year, when the data wasn’t great, the industry was in jeopardy.

Last month I raised my fifth recession red flag knowing that builders were about to pull out of construction and focus on selling their remaining homes and dealing with the upside cancellation rates. My only argument here is that if we need mortgage rates of 3-4% for builders to build at the expense of home prices rising 15-20% per year, that’s not a good trade-off.

Jobs and income will be lost.

As we all know, many companies in the real estate and mortgage industry are laying off employees. It’s not just businesses that have exploded due to COVID-19, so we have real property damage to households. Also, with fewer transactions, less commission transfer will occur in housing.

Getting closer to a recession

With the red flag of the fifth recession raised due to rising mortgage rates, we are getting closer and closer to a full recession in the United States, which in part means that more and more Americans are losing their job and their lives are turned upside down. With higher rates, inflation and no jobs, this is a stressful time for all households, especially those with children.

To conclude, I called this market wildly unhealthy earlier this year because I knew what that data would look like. House prices go up even with higher rates, so we don’t profit from lower house prices, even if sales fall. This has happened before when rates rose, sales fell, and price growth slowed but did not turn negative.

However, it’s a different ball game here in 2020-24. The S&P CoreLogic Case Shiller Home Price Index, although lagging, still shows 20%+ year-over-year growth. In the past, with higher rates, the growth rate would cool down to single digits. Obviously, we’re not there yet, but we should get there in time as stocks increase.

I hope this explains why I’m part of the “higher rate team” and why I believe a balanced housing market is best. Higher rates work; it just takes longer to bring us back to 2019 inventory levels.