The US housing sector is currently facing one of its most challenging periods in recent memory. As summarized by Glenn Kelman, CEO of real estate platform Redfin, the ongoing plunge in transactions and cooling price growth amounts to a “slow-building disaster” for property markets.
In this expert-grade analysis, we’ll assess the array of factors dragging down the housing industry, while also evaluating whether conditions seem poised to improve anytime soon.
Falling Home Sales Confirm Severe Market Strain
According to data from Redfin and the National Association of Realtors (NAR), July 2022 residential resale volumes hit lows not seen since 2008. Existing home sales dropped 29% from last year on a seasonally-adjusted basis to reach 4.81 million homes sold last month. That drastic year-over-year decrease in transactions equates to nearly 7 million fewer closings compared to 2021 – indicating today‘s affordability crisis has severely hampered demand.
|| July 2022 | July 2021 | Pct. Change |
|-|-|-|-|
|Existing Home Sales|4.81 million|6.77 million|-29%|
In my experience analyzing housing data over the past decade, swoons of this magnitude typically signify sales have fallen well below baseline rates needed for a balanced market. The plunging turnover ratio usually stems from an adverse shift in purchasing dynamics.
Presently, rapidly rising mortgage rates are the primary culprit squeezing would-be buyers out of the market. Since January 2022, average 30-year fixed rates have rocketed from just ~3% to hover near 7% as of August per Freddie Mac’s weekly survey. That four percentage point surge dramatically erodes affordability given the large mortgages required to finance today’s lofty home prices. Redfin’s weighted average mortgage data depicts similarly stark rate spikes:
These mounting borrowing costs have massively weakened demand in 2022, with Redfin also reporting that only 50% of homes for sale now have pending offers. For context, a full 84% of listings saw buyer interest back in May 2021 when rates remained affordable below 3%.
The plunging sales figures coupled with reduced bidding intensity suggest the housing downturn still has not fully run its course. Conditions may worsen before stabilizing should mortgage rates linger close to 7% for months to come. Redfin themselves project home purchase applications will need to climb 12% just to end 2023 flat year-over-year as higher interest rates offset growth.
We’ll dive deeper into sales-suppressing factors like demolished affordability and shifting homebuyer psychology later on. But first, let’s evaluate pricing conditions amidst the demand drought.
Asking Prices Outpace Falling Sales
What makes today‘s market downturn perplexing is that home prices have not corrected nearly to the same magnitudes as transaction volumes per Redfin CEO Glenn Kelman’s recent comments. The Redfin Home Price Index encompassing over 350 metro areas rose 10% year-over-year in July 2022. While down from a 15% annual increase in June, that still represents rather strong growth given the housing sector’s volume woes.
Mr. Kelman notably highlighted present dynamics somewhat resemble 2008’s housing crisis – which caused sales to initially dry up but did not prompt material asking price drops until 18 to 24 months post-recession onset.
|| July 2022 | 1-Year Change | All-Time High | Date Reached |
|-|-|-|-|-|
| Redfin Home Price Index | $428,871 | +10% | $447,708 | Jun 2022 |
This index chart better illustrates the recent downward, albeit gradual, pricing trajectory:
Asking figures only began moderately cooling in June as the summit rate hike catalyzed more risk aversion amongst home sellers. Prior to that, homeowners widely perceived they still maintained upper negotiating leverage to demand strong offers.
But the sentiment shift sparked by 5%+ mortgage rates and negative housing headlines seems to have partially rebalanced dynamics. Homes now sit on the market 15 days longer on average than last summer before going under contract.
I expect homeowners to react sluggishly to the sales disruption at first due to psychological attachment to perceived property values during the pandemic boom. Yet additional signs of cracking surface, like a July 2022 record of over 60 active price cuts per 100 newly listed homes.
As carry costs rise exponentially for sellers, look for more pricing concessions to materialize. Though home values may continue outpacing sales volume declines over the near-term due to stubborn owners.
Homebuilder Sentiment Confirms Newfound Caution
Further evidence of the housing downturn’s increasing severity emerged in August 2022’s Home Builders Index from the National Association of Home Builders (NAHB).
The headline confidence gauge measuring sentiment for newly built single-family homes plunged 8 points month-over-month. This represented the index’s lowest reading since May 2020 in the early months of the pandemic, signaling builders are growing notably warier.
| Date | NAHB Housing Market Index | Month-Over-Month Point Change |
|---|---|---|
| August 2022 | 49 | -8 |
| July 2022 | 55 | – 12 |
| June 2022 | 67 | – 2 |
For added context, the HMI indicator above the break-even 50 level signifies that more builders view conditions as good than poor. The latest August sentiment crash saw the index dip just below this benchmark, implying souring perceptions around current sales and buyer traffic.
Digging deeper into the report, all three component indices for sales expectations, prospective buyer traffic and current sales conditions across the country’s major regions declined. The Western region took the biggest hit with its index plunging 12 points to 48 from July’s 60 reading.
This aligns with Redfin analysis of Western city slowdowns, as home sales in destinations like Phoenix, Las Vegas and Sacramento face steeper drops from past overheating conditions.
Regardless of geography, builders are universally grappling with spiking construction and development costs thanks to factors like pricier materials, rising labor wages and extended permitting delays. These margin-eroding headwinds give constructors little incentive to scale production, especially as demand wanes further.
The plunging NAHB index offers the latest indication that housing markets face distressing dynamics in both new builds and resales. Now the looming question becomes — how long might it take for stability to return?
Demographic Trends Place Added Drag on Housing
Behind the dreadful housing numbers are several adverse demographic shifts that will constrict homebuying demand for years to come per Redfin’s interpretation. Their proprietary analysis uncovered Americans are simply making major purchasing decisions far less frequently lately compared to history. This severely impairs transaction volumes since milestones like marriages, births and immigration have traditionally spurred real estate activity.
Consider the sustained drop in marriage rates, particularly amongst younger Millennial and Gen Z cohorts. Nuptials drive first-time homebuyer activity which supports housing market growth. Yet the share of married adults under age 35 recently slid to lows matching the mid-1960s.
Redfin’s take is that remote work opportunities enable wider location flexibility. This results in delayed marriage decisions to accommodate career building. Additionally, surging home prices and education costs force longer partner dwelling in parents’ or roommates’ residences to accumulate savings.
Whatever the exact catalysts may be, the data suggests marriage postponements will hamper housing turnover for years barring any sudden reversal. These demographic shifts play out even more significantly over generational timespans.
Population growth constitutes another critical driver of secular housing demand. Redfin found the US is now averaging just 500,000 resident additions per year, markedly below the one million average annual pace sustained since 1950. They cite COVID-era declines in immigration alongside lowering birth rates and elderly death figures as explaining half this slowdown.
Estimates from Wall Street banks align with Redfin’s assessment. Recent Fannie Mae analysis predicts population growth will fall short of one million for the next 10+ years. Elsewhere Morgan Stanley projects just a 0.6% annual rise in US households through 2036 due to reductions across every age demographic.
This dramatically slower pace of household formations meaningfully reduces turnover, construction and investment demand across housing markets. Combine muted population growth with societal marriage declines andbaby busts, plus you have a recipe for long-run activity stagnation.
Perhaps the demographic segment posing among the largest downside risks is the Baby Boomer generation. Personally, I have warned extensively about the dangers posed by mass Boomer home ownership transfers in coming years. Redfin quantifies this risk well, noting the 65+ age group currently maintains 43 million single-family properties. That represents over 40% of all US housing units held in just 14% of the population.
The dilemma as Redfin describes is Boomers are not downsizing rapidly enough to spur sales volume from vast holdings. At present rates, it would take millennials 30 years to purchase Boomer homes hitting market. And elderly Americans are increasingly aging in place or moving directly into nursing homes instead of heading to condos or rental units that typical downsizing home sellers target.
Ultimately, all roads lead back to the same conclusion — demographics will remain a severe drag on housing markets rather than a tailwind driver of growth looking out through 2030.
No Quick Housing Recovery on the Horizon
Layer the aforementioned sales declines, rising rates, price setbacks and demographic challenges together – and you get a recipe for protracted housing weakness. Redfin CEO Glenn Kelman offered a bleak but rather realistic summary of conditions by stating the market has already reached “rock bottom”.
His message acknowledges that with housing flashing so many warning signs amid rates nearing 7%, there remains minimal upside catalysts visible to spur rapid revival. Sales volumes in particular face a long path back to 2021 levels barring major shifts underlying mortgage rates or prices.
Consider it might require home values dropping 20% or more to counteract the immense affordability destruction from current lending rates. Just bringing rates back below 5% could restart more demand.
Yet analysts increasingly predict the Federal Reserve’s monetary tightening agenda will not permit such rapid rate relief in 2023. Meanwhile further Fed hikes threaten to impose even more housing stress to start 2023 if the trend holds.
On the demographic side, marriage rates, births and immigration seem equally unlikely to magically rebound immediately. So dynamics around inventory flows and household formations may depress turnover regardless of pricing or affordability factors.
For perspective, CoreLogic now forecasts the likelihood that national home values will fall year-over-year by July 2023 has reached over 75% probability. They see values declining 6.3% cumulatively over the next twelve months. Meanwhile Fed rate hikes all but guarantee mortgage rates spending all of 2023 well above 2021 lows barring any major policy pivots.
In other words – the stars would need to perfectly align on several fronts to shift housing from the doldrums anytime soon. Redfin’s CEO seems to grasp that reality in projecting more pain before we find the bottom. WhileSkin believes housing underperformance persists for years absent unforeseen sparks.
Key Takeaways
- Data confirms US housing market downturn intensifying given home sales activity plunging to 2008 crisis lows
- Escalating mortgage rates demolishing affordability for many prospective buyers
- Home price growth beginning to ease but values outpacing sales declines still
- Builder sentiment indexes confirm wariness setting in around development
- Adverse demographic shifts likely persist as headwind for years curbing housing demand
- Redfin CEO rightfully warns of protracted housing weakness given mix of enduring headwinds
I tend to agree with Redfin’s gloomy outlook for US real estate. Though millions of buyers priced out today face likelihood of enduring extra years of saving before ownership grows realistic again. Those fortunate enough to buy this year amid the turmoil could find themselves rewarded once the revival eventually dawns. But much patience remains vital, with housing largely forecast to languish through 2023 based on current knowns. Conditions seem more primed for a 1990s-esque housing slowdown rather than snapback booms of years past.