Weekend Talking Points - 'Recap'

Authored By:
Scott Bradley Brixen
John Smith
January 1, 2023
5 min read

After taking a break last week (20th wedding anniversary in Sicily, woohoo!), let’s catch you up on all the important real estate news of the past two weeks. It was a pretty mixed bag.

Less than hoped for. Existing home sales dropped 1% month-over-month in December 2023, to a seasonally-adjusted, annualized rate of 3.78 million units sold. That was somewhat disappointing, considering the downward move in mortgage rates and the modest rise in inventory levels in recent months. [NAR]

For full-year 2023, total existing home sales were 4.09 million, down 19% year-over-year, and the lowest figure since 1995. The 2023 median sales price of $389,000 was, in contrast, a record high. Most forecasters expect a 2024 rebound in transactions of between 5–20%. [NAR]

At least the builders did better. New home sales for December 2023 rose 8% month-over-month to a seasonally-adjusted, annualized rate of 664,000. For full-year 2023, new homes sales rose 4% year-over-year. The median new home sales price in December 2023 was $413,200, down 14% year-over-year. [Census Bureau]

Building more homes, just smaller. But most of that apparent price decline is because builders are delivering a larger share of smaller, more affordable homes. In December 2022, 53% of homes sold were priced between $200K and $500K. In December 2023, this had risen to 64%. [Census Bureau]

Up 6.6% for the year. Redfin’s HPI is a repeat-sales method price index — designed to match Case-Shiller’s approach, but without the 1–2 month lag. On Redfin’s numbers, home prices rose 0.4% month-over-month in December 2023. That was the smallest monthly increase in prices in six months, but it means that home prices rose nearly 7% over the course of 2023! [Redfin]

This economy won’t back down. Most forecasters (your author included) expected a modest recession to take hold in 2023. That didn’t happen. In fact, GDP growth has been much stronger than expected DESPITE much higher interest rates. After rising an incredible 4.9% annualized in 3Q 2023, US GDP increased 3.3% in 4Q 2023 — well above expectations of ~2%! [Commerce Department]

The problem with economic good news. With the economy humming along very nicely indeed, the job market still tight, and inflation trending downward, the Fed appears to have orchestrated the impossible: the softest of landings. The problem with this situation is that the lack of economic “pain” means that the Fed has no real urgency to begin cutting rates.

Back near 7%. This is why average 30-year mortgage rates have slowly drifted upward from near 6.5% to almost 7% over the past months. Much of the excitement regarding the Fed’s unofficial (and later disavowed) “pivot” has disappeared, and the “higher for longer” camp has gained ground. Nonetheless, the market still expects rate cuts to begin by May. [Mortgage News Daily, CME]

A Bit of Inspiration

Only 4.09 million existing homes changed hands in 2023 — the smallest number of transactions in nearly 30 years. Wait! Why is this depressing news in the Inspiration section? Because this level of activity is unsustainable. Unsustainably LOW.

The NAR recently published an article comparing the housing market in 2023 vs 1995. It’s really quite incredible:

  • The US population grew by 26% between 1995 and 2023.
  • That means that the number of households increased by 22 million over the same period (~3.1 people per household).
  • But the inventory of single-family homes shrank by 45% over the same time period.
  • And the median price rose by 240%.
  • Not shown in the table is that the median household income rose by 98% over the same time period.

But this comparison is also somewhat misleading. In 1995, existing home sales were in the middle of a 23-year expansion. Whereas the 2023 figure is the “low” after the pandemic driven “highs” of 2021 and 2022.

Over the last 5 years (that’s the “highs” + “lows”), the average existing home sales figure has been 5.2 million units. Over the last 10 years, the average has been 5.3 million units. Basically, the pandemic upswing has now been balanced by the post-pandemic downswing.

Here’s what I think will happen:

  • Existing home sales will recover to over 4.5 million in 2024. The commission pool will rise even higher because prices are up.
  • New home sales are in the early stages of a multi-year bull run (Berkshire Hathaway made a bet on the builders for some very simple reasons).
  • Many of the families who bought second (or third) homes during the pandemic are going to look to sell. The viral threat is over, they’ve made great money, and they don’t need to buy a replacement property. They’re not “locked in” by low mortgage rates. They just want to “lock in” their gains!
  • Home price growth is going to be positive, but modest, over the next few years. It simply can’t match the growth of the last few years.

We’re at, or very near, the bottom. Now is not the time to mope about. Quite the opposite. This is the time to gain share.

Mortgage Market

Having hit a low of 6.6% in mid-December 2023, mortgage rates have been climbing steadily. It’s not because inflation has rebounded (though global conflicts are a concern), but because the economy keeps growing at above long-term averages, and the job market remains as tight as a whalebone corset.

The next Fed rate decision will be next week — on January 31. The Fed Funds futures market is currently pricing in a 97% probability that the Fed will do nothing (no hike, no cut). For the subsequent meeting on March 20, the probability of a 25 bps cut (0.25% or one-quarter of 1%) is now 48%, having been as high as 70%.

They Said It

“The latest month’s sales look to be the bottom before inevitably turning higher in the new year. Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.” — Lawrence Yun, NAR’s Chief Economist.

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