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Capital Market Impact

Home is where the expenses live

August 31, 2022

Incoming data suggest something is occurring in the housing market: new home sales fell 12.6% to a 511,000-unit pace in July, far below the 575,000 consensus estimate. Simultaneously, the monthly supply of new houses for sale swelled to 464,000, the most significant inventory backlog since 2008.

Meanwhile, mortgage lenders, major brokerages, and large banks have announced layoffs over the last few months as the housing market has slowed. If misery loves company, then homebuilder sentiment also joined the negative investor sentiment party, with homebuilder sentiment dropping 12 points to 55 in July. According to the National Association of Home Builders, the 12-point drop in builder confidence was the most significant single-month drop in the survey’s 37-year history, excluding the pandemic. With the housing market retrenching due to the Federal Reserve raising interest rates to subdue inflation, affordability will continue to be a massive headwind facing the housing market.

Due to a myriad of reasons, the rapid price appreciation of the housing market has been astounding. For example, the latest S&P CoreLogic Case-Shiller National Home Price Index recorded a 19.7% annual gain in May, almost double the rate in 2012 when the housing market rebounded from the Global Financial Crisis. Over the past few months, a potent cocktail of rising home prices, rising mortgage rates, and decades-high inflation have builders offering discounts, consumers unable to afford record-high principal and interest payments, and prospective buyers heading for the sidelines. To illustrate, in July 2020, the 30-year mortgage rate was approximately 2.99%, and the median existing-home price in the U.S. was $305,600. Two years on, the 30-year mortgage rate increased to around 5.3%, and the median existing-home price climbed to $403,800. Assuming a 20% down payment, the monthly payment on that average existing home price would be approximately $1,794, a staggering 74% increase in the monthly payment from July 2020.

No wonder Fannie Mae “sees dark days ahead for the housing market.” Moreover, Douglas Yearley, Toll Brothers, Inc. Chairman & CEO, stated that “early on in May and June, and I talked about it a bit on the May call, that we expected a slow summer. We think buyers with not only the rise in home prices but the doubling of mortgage rates, all the chatter about inflation, the headlines were starting to hit about a softening market; we knew they were headed to the sidelines.” However, this housing cycle is different from the Global Financial Crisis, which was primarily driven by speculative underwriting. With affordability no longer a tailwind for home buyers, prospective buyers should be cautious about the uncertain trajectory of the housing market.


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