Weekend Talking Points - 'Don't Mess With'

A very odd week, with solid new and pending home sales figures, but a “sneak peek” at Friday’s PCE that spooked the bond market even as the economy cooled.

New home sales beat expectations. March new home sales rose 8.8% month-over-month to 693,000 units (SAAR). But the February number was revised down by 3.8%, which flattered the growth in March. The median price for new homes sold rose 6.0% MoM to $430,700, but was still down 1.9% YoY due to a rising % of more affordable homes. [Census Bureau]

Rising inventory of new homes FOR sale. The number of new homes FOR sale rose 2.6% MoM to 477,000 in March. That’s the highest monthly figure seen since February 2008, and is only 16.6% below the July 2006 peak of 576,000 units. More on this later. [Census Bureau]

GDP growth came in below expectations. The first read of 1Q 2024 GDP growth came in at 1.6% annualized, well below consensus expectations of 2.4–2.5%, and just half of the +3.4% seen in the previous quarter. Slower economic growth should have been good news for bond prices, but there was something else that scared the market. [BEA]

Reminder: GDP = C + I + G + (X — M). That’s Consumption + Investment + Government Spending + Net Exports. Consumption represents roughly 70% of US GDP.

A scary “sneak peek” at PCE? Spooked by the “core” PCE (+3.4% annualized for Q1) figure inside the GDP report, the yield on 10-year US Treasury bonds jumped above 4.7% on Thursday. 10-year UST yields have now risen nearly 100 bps (1%) in the last four months.

Nationwide inventory keeps rising. For the week ended April 20, active listings were +31.7% YoY and new listings were up 13.5% YoY. [Realtor.com] More homes available for sale = more homes sold…especially if they’re priced reasonably.

Signed contracts surge. The NAR’s pending home sales index for March rose 3.4% MoM to 78.2, the highest level since February 2023. While mortgage rates remained high during March, inventory levels were 20–25% higher than in March 2023. [NAR]

New housing forecasts from the NAR. They now see existing home sales rising 9% year-over-year in 2024 to 4.46 million units, and then jumping 13.2% YoY in 2025 to 5.05 million units. Median home prices are expected to increase 1.8% YoY in both 2024 and 2025 as inventory levels rise. [NAR]

Pending Home Sales: West Rebounding, South Sliding

On a nationwide basis, the March pending sales figure from the NAR was solid (+3.4% MoM). But when you look at the regional indexes, you see a very different picture:

• South index (yellow line): -4.1% MoM, -11.8% YoY. The March index level of 85.8 is a new, multi-year low. The South includes Texas and Florida.
• West index (green line): +6.8% MoM, +3.6% YoY. The March index level of 61.0 is 11% above the near-term low of 54.9 seen in October 2023.

Life Keeps Happening, and There’s a Lot More of Us Today

In 2023, we had 4.1 million existing homes change hands. That was the lowest figure since 2008.

A more “normal” figure would be 5.2-million (2012–2019 average). Interestingly…if you take the average of 2020–2023 (capturing both the pandemic highs and lows) you get…5.2! I have zero doubt that this will normalize soon. It’s just a question of time.

And the case for a big, near-term snapback in existing home sales gets even stronger when you consider that our population has grown by 40 million over the last 20 years!

The graph below looks at existing home sales per 1000 people. The average during 2012–2019 was about 16. We’re at 12 now, which is the lowest figure seen in two decades. It will not stay there for long.

Life keeps happening, regardless of home prices and mortgage rates. And there are a lot more Americans that life is happening to these days! With this in mind, I’d expect the existing home sales per 1000 people to rebound to 14–15 in the next 2 years, which implies 4.8–5.1 million units sold.

That’s Why the NAR is Forecasting a Snapback

The National Association of Realtors just revised their housing market forecasts for 2024 and 2025. (To be clear, they lowered them.) They now see existing home sales rising 9% year-over-year in 2024 to 4.46 million units, and then jumping 13.2% YoY in 2025 to 5.05 million units.

These projections make a lot of sense to me. Essentially, they’re forecasting the existing home sales / 1000 people figure to rebound from 12 in 2023 to 14.9. That’s still below the long-term average of roughly 16, but considering where home prices and mortgage rates are, it feels about right.

How about prices? NAR sees median home prices rising 1.8% in both 2024 and 2025. That may not seem like much relative to the home price growth we saw during the pandemic, but keep in mind that 3.6% (1.8% + 1.8%) on a median home price of ~$400K is still $14,000 in appreciation!

A Focus on Texas

A few weeks ago I wrote about rising inventory levels and stalling home prices in some major metros in Florida. This week, I’m doing the same analysis for Texas.

Even if you’re not from Texas, you need to pay attention to what’s happening in the Lone Star State. Why? Because Texas is the nation’s 2nd-largest contributor to both active inventory (13%) and monthly new listings (11%). Nearly one-third of the nation’s active inventory is in Florida plus Texas. Add California and you get to 38%.

Texas Facts

Population: 30 million (#2 after CA with 39 million, but ahead of FL with 23 million)

Active Listings (Mar 2024): 89,639 (13.0% of total US active listings)

New Listings (in Mar 2024): 40,712 (10.5% of total US new listings)

Median Listing Price (Mar 2024): US$365K (Florida is $459K)

Increase in Median Listing Price (YoY)

2017: +4.9%

2018: +2.1%

2019: +0.0%

2020: +5.2%

2021: +15.2%

2022: +7.1%

2023: -1.4%

2024 YTD: 0.0%

Median Listing Price: Texas

Active Inventory: Texas

At the state level
Similar to Florida, Texas’ active inventory of nearly 90,000 listings is basically back to pre-pandemic levels. But while home prices in Texas, on average, moved up 40% during the pandemic, prices in Florida rose 50%.

But let’s look a little closer
I used Realtor.com’s residential listing database to look at inventory and listing prices for Texas’ four largest metros (the so-called ‘Texas Triangle’ of Dallas-Houston-San Antonio-Austin). Together, these cities account for roughly 68% of the state’s population and 62% of the state’s active inventory. (I also included El Paso and McAllen in the analysis for good measure.)

I found that all four major Texas metros had current listing prices that were 9–13% below their mid-2022 peak. (Part of this is seasonal, some of these decreases are likely to close as the spring selling season kicks in.) But only two of the big four had active inventory levels that were ABOVE their end-2019 (pre-pandemic) levels, and only Austin had significantly more inventory than pre-pandemic.

As ever, Austin stands apart, having seen listing prices rise 80% (!!!) during the pandemic-driven boom, and now experiencing inventory levels that are 25% above pre-pandemic. On these two measures, Austin looks very similar to North Port-Sarasota and Cape Coral-Ft Meyers in Florida. All three metros appear at risk of further price decreases. Also keep in mind that this analysis does not include the impact of new construction!

In contrast, prices in Houston and Dallas look more secure: the home price increases were more modest during the pandemic, and inventory is still well below pre-pandemic levels. The statistics from these two cities remind me of Miami and Tampa in Florida, except that prices in the Florida cities rose much more.

What’s Happening in the New Home Space?

March 2024 new home sales of 693,000 units (SAAR) were 50% below the July 2005 peak of 1,389,000 units. As we know, today’s situation is nothing like the rampant overbuilding and imprudent lending of the Housing Crisis.

But the March 2024 figure for new homes FOR sale of 477,000 units (SAAR) is only 17% below the July 2006 peak of 576,000 units. By the way, that 477,000 is the highest monthly figure since February 2008.

If we look at the ratio of (for sale / sold)*12 = months inventory, we’re at 8.3 in March. Looking back historically, whenever that ratio exceeded 8, we were already in (or shortly would be in) a recession. Well, we’ve been above 8 for most of the last two years!

Mortgage Market

It was a fairly quiet week for data until Thursday, when the advanced reading for 1Q 2024 GDP came out. Included in that report from the Bureau of Economic Analysis was a quarterly PCE figure, which showed “core” (ex-food and fuel) PCE rising 3.7% in the 1Q (on an annualized basis). Remember: the “core” PCE is the Fed’s preferred measure of inflation. It matters a lot.

The full PCE report for March will come out tomorrow. But the bond market wasn’t going to wait, and reacted violently to the PCE “sneak peak”. 10-year US treasury yields shot above 4.7%, and average 30-year mortgage rates moved back above 7.5%.

Current odds on Fed rate cuts at upcoming FOMC meetings:

• May 1: 6% (up from 2% last week)
• Jun 12: 9% (down from 15% last week)
• July 31: 32% (down from 41% last week)
• Sept 18: 59% (down from 65% last week)

They Said It

“Home sales have lingered at 30-year lows, and since 70 million more Americans live in the country now compared to three decades ago, it’s inevitable that sales will rise in coming years. Inventory will grow steadily from more home construction, and various life-changing events will require people to trade up, trade down or move to another location.” Lawrence Yun, NAR’s Chief Economist

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