- Housing supply surged in April as higher mortgage rates suppressed demand.
- Ian Shepherdson warns of further declines in home sales.
- He also warned that there could also be a short-term drop in house prices.
The real estate market music starts to stop The hottest home buying period in history.
as Fed hikes rates Mortgage rates have soared by about 50% in an effort to curb four years of high inflation. That weighed on buying demand as monthly housing payments became more expensive, sending the monthly supply of homes soaring to their highest level in 12 years.
Shepherdson warned in a recent note to clients that a bottom for mortgage demand “has not been seen”.
“It’s not rocket science; when the monthly payment of a potential home buyer goes up by 50% in eight months, demand goes down,” he said. “More of the same is expected and it will support existing home sales that have closed in due course.”
In addition to falling demand, Shepherdson also warned that an increase in new homes being built would lead to slower activity.
“Inventory of new homes is now at 9.0 months — up from 6.9 months in March — well above existing home inventory at just 2.1 months,” Shepherdson wrote in a note to clients. “Homebuilders have tried to capitalize on the shortage of existing homes by increasing inventory and raising prices, up about 20% over the past year. But with demand plummeting and existing home inventory increasing, this strategy is unsustainable; listings Volume increased by 14 percent between February and April, with more to come.”
“In short, the party is over,” he added.
All of this means house price growth will continue to slow, and even fall in the short term, he said.
“As the market adjusts to plunging demand and soaring inventories, a brief downturn is entirely possible,” Shepherdson added.
“The pace of price increases will slow sharply; compared to inventory levels, they were significantly overshooting even before the April jump,” he said in a separate report. “As the market finds a new balance, we cannot A short-term absolute decline is ruled out.”
But Shepherdson said the current market isn’t the same as in the mid-2000s, where prices don’t plummet in the same sustained fashion because there are far fewer adjustable-rate mortgages, forcing many homeowners to sell their properties one last time. In the mid-2000s, about 40% of mortgages could be adjusted; now only 1%.
He also said a slowing housing market would not crash the economy like it did around 2008. However, he warned that certain areas of the economy would be “affected”. These include materials, appliances, furniture.
“Home builders, suppliers of housing sensitive items and retailers will be affected,” he said.
Fears of a housing market bubble have been brewing as mortgage rates have soared. But most experts say those fears are misplaced and house prices are unlikely to fall significantlye. Many cite relatively low supply as the reason for not seeing a bubble.
Daan Struyven, senior global economist at Goldman Sachs, said: “We believe the main reason for the absence of a housing bubble in the U.S. is the very tight housing supply, while acknowledging the challenges posed by rising mortgage rates and pricing uncertainty.” In fact, the first The homeowner vacancy rate fell to an all-time low of 0.8% in the quarter. Likewise, the supply of existing homes available for sale during the month remained near the lowest level on record in March. “
However, supply dynamics have been evolving rapidly. The Census Bureau and the Department of Housing and Urban Development reported a sharp increase in the monthly supply of homes this week (see first graph above). That’s partly due to cooling demand and a surge in new home inventory.
Others, like David Rosenberg, president and chief economist at Rosenberg Research, and Desmond Lachman, a senior fellow at the American Enterprise Institute, said a bigger drop was on the horizon.
“As mortgage rates rise sharply and affordability constraints become more severe, the bursting of this bubble and the corresponding negative wealth effects will be staggering,” Rosenberg said recently.
Lachman said he expects a decline of 15-20% going forward.
Still, Shepherdson isn’t calling for a long-term drop in house prices, but a slowdown in appreciation and a possible short-term decline as the market finds its footing amid the changing dynamics.
But transformation is the key word. Market conditions for would-be sellers could get worse as the situation develops and the Fed continues to hike rates aggressively to slow consumer demand.