November 2022
In my October housing market report, the July 2022 Case-Shiller Index of home prices in the U.S. looked like this.
It was the first drop in the index in 45 months, since January 2019!
This month, the new August 2022 Case-Shiller Index dropped further, and faster.
The National Association of Realtors (NAR) also forecasts price drops in both existing homes and new homes.
Year-on-year, home prices are still up. NAR’s latest reported median price of existing homes was $384,800 in September, which is 8.4% higher than that in September of the previous year.
Still, national existing home prices are clearly below their peak of $414K in June 2022.
The fact that prices continue to slip down is hardly surprising. Here is what Powell said on Nov 2nd,2022: “Today, the FOMC raised our policy interest rate by 75 basis points, and we continue to anticipate that ongoing increases will be appropriate.”
That’s three-quarters of a percent, four times in a row, following two smaller rate hikes in March (0.25%) and May (0.5%).
And the higher interest rates are going to be the “new normal” for quite some time… Well, actually, the old normal becoming the normal again, after a period of abnormal. So, don’t expect to see the abnormally low interest rates again any time soon. Like I said in my previous market report, those ultra-low interest rates of yesteryear are a thing of the past.
Powell did say in the same press conference that “… at some point it will become appropriate to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that.” In the meantime, the latest reading of the 30-year fixed rate shows the value of 7.08% on Nov 10. And for the 15-yearfixed, the latest number is 6.38%.
This helps explain why the share of Adjustable Rate Mortgages shot up from 3.3% of all mortgage applications in October 2021 (according to data from Mortgage Bankers Association) to 12.7% in October of this year.
The higher interest rates and the higher effective housing costs are causing a significant drop in mortgage applications. According to the Mortgage Bankers Association, mortgage applications fell for the 6th consecutive week, to the lowest level in 22 years. MBA predicts that the total mortgage origination volume will decline from $2.26T at the end of 2022 to $2.05T in 2023.
This drop, in turn, is causing a leftward shift of the demand curve for new and existing homes, putting a downward pressure on the prices of homes, which, in turn, is at least partially offsetting the high cost of purchasing a house. Homebuyers can now actually breathe a little, and don’t have to rapid-fire above-asking price offers accompanied with lachrymose personal letters in the hopes of getting noticed by the besieged and overwhelmed sellers.
Let’s now turn to the more refined, granular local data, for Palm Beach County Florida.
Recall my 5 indicators of the health of the housing market. They include: (1) most recent changes in home prices; (2) days on the market; (3) the share of homes sold above list price; (4) the share of homes sold for cash; and (5) the share of listings that had to reduce their price.
Indicator #1: Price Trends
The median price of single-family residences in the Palm Beaches is down from its peak of $675K in June of this year to $620K at the end of October. That’s a drop of 8.9%. However, on a month-over-month basis, the price went down only about 0.5%, from previous month’s median price of $623,250.
Townhome prices stayed essentially flat at $380K compared to the previous month, but are down nearly 8% from their peak of $410K in May.
Condo prices plummeted almost 21% from the high of $380K in April to $315K today, which is about 5% lower than the median price of $331,500 last month.
Thus, by and large, prices are down. However, year-over-year, the prices of all three types of residential properties are still up, by a lot: the median price of single-family homes in the Palm Beach County a year ago was $520,000. For townhomes, this figure was $335,000 in Oct 2021. And for Condos, it was $270,000 in October of last year.
Indicator #2: Days on the Market
The days on the market is a super useful measure that’s indispensable in helping us gauge the comparative strength of supply vs. demand in the housing market.
As you can see on the graph below, days on the market plunged from the multi-year normal of about 5.5 weeks, all the way down to just one week!
Home sellers and their listing agents in the Palm Beaches were riding high and living large between spring 2021 and spring 2022. But this party came to an end in the early summer of this year, the days on the market began climbing and have been climbing every month ever since. The balance has been tipping back for the past 5 months or so towards the buyer.
Indicator #3: % of Homes Sold Above List Price
This chart looks like a mountain peak, except we’ve now crossed to the other side and are now coming down from the head-spinning heights.
At the summit, which happened in April 2022, fully two-fifth of all transactions were sold above list price. That’s about 7 times the usual range. Now, by the end of October, percent of homes sold above the asking price came down to 14%, and this trend seems to be continuing.
Indicator #4: % of Cash Purchases
We all know that the pandemic has also brought a lot of cash buyers to the area. The share of transactions made in cash went up from the long-run average of about 45% to about 55% during the late pandemic. But as you can see here, this indicator too is showing a trend towards the normal range.
Actually, this chart is interesting in its strong seasonality. Look at how the chart peaks between every January and March and bottoms out in mid-summer. Also, it went up, as usual, in Jan 2021 but didn’t quickly come down as much in late spring, as it typically does. So overall, cash purchases are still elevated but there is a clear downward drift.
Indicator #5: % of Listings that Lowered the Price
How many home sellers have had to eventually drop their list price, after having tested the market for a while? According to this chart, it’s 37%, or more than 1/3 of all listings in October 2022.
Compare this to May 2022, when a mere 13% or just 1/8th of all listings had to make price adjustments. This is a steep climb, you know!
So, to sum it all up, practically every measure of the housing market performance that I showed in today’s video is pointing to the reversion of the market to its long-run normal. We are not quite there yet, but we are getting there.
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Until then, À toute à l'heure!