Everyone knows the real estate market madness can’t last, then the first low turns into a big drop

Now they are wondering why.

Through Wolf Richter for LOUP STREET.

Home prices have skyrocketed in double digits from last summer, despite the loss of 10 million jobs and with 2.5 million mortgages still in arrears, as mortgage rates rose from their all-time low to their all-time low. People have bought homes without putting their old vacant home on the market because it pays to keep it, amid soaring house prices and low interest rates and the ability to cash out. money from the old house via a refi. As homes were foreclosed and sales rose, more homes were not put on the market, inventories for sale fell, and prices skyrocketed. But now sales have gone from a preliminary drop at the end of last year to a steep drop in February. And everyone is wondering why.

In February, sales of existing homes – single-family homes, condos and co-ops – fell 6.6% from January to a seasonally adjusted annual rate of 6.22 million homes, according to the National Association of Realtors. reported today. Year over year, sales from September to January had increased in a range of 19% to 24.4%. In February, the year-over-year increase was down to 9.1% (data via YCharts):

Now everyone is wondering why the sales have plummeted.

Rising mortgage rates and affordability At the top of the list are the problems that stem from the double impact of soaring house prices and rising mortgage rates. But note that many of the home sales that closed in February were made before February, and in January mortgage rates were just starting to rise from year-end lows. And we haven’t even seen the impact in the data of rising mortgage rates in late February and so far in March.

Inventory of houses for sale plunged to a record low in the data series in January of 1.03 million units, and stayed there in February, accounting for 2.0 months of supply at the current pace of sales (up from 1.9 months in January).

Why the 12-year drop in stocks for sale? There has been a structural change: the business of selling homes has changed. It used to take months to sell a house, from the time the house was listed in a print publication until the day the sale closed, involving a lot of personal contact and paperwork. Now homes appear instantly in listings and are marketed online; potential buyers can view the home via video. Mortgage approvals are largely automated and lightning fast. As a result, the length of time that houses stay on the market while waiting for processes to occur has been shortened. This reduces the inventory for sale. During the pandemic, technology surged into home sales with a leap forward and sped up processes.

The ghost inventory: With low mortgage rates and soaring house prices, home buyers have no desire to sell the old home. They can simply keep the house vacant and take advantage of current price increases that far exceed the costs of ownership. In addition, they can refinance the mortgage and withdraw money from the vacant home, while speculating on further price increases. I personally know several people who have done this as part of their financial calculation.

The share of purchases of second homes as a percentage of total home purchases climbed to over 6%, a high in the data series by the AEI Housing Center, and well above the previous two years at this time. Some of them can be vacation homes, others can be part of the city exit, people just not selling their old home:

Forbearance mortgages are still a big factor. According to the Mortgage Bankers’ Association, 2.5 million mortgages, or 5.1% of all mortgages, are still in forbearance, meaning lenders have agreed not to exercise their right of foreclosure, thereby allowing the borrower to skip mortgage payments. Many of these mortgages were already in arrears when they went into forbearance.

“Tolerance” does not mean “forever”, although it may now appear so, given the repeated extensions. Exiting forbearance can take a number of forms, including marketing and selling the house to pay off the mortgage.

Prices shake up historical seasonality.

The median price of all existing homes jumped 15.8% year-on-year to $ 313,000, according to the NAR report. This is an increase of 46.5% from five years ago. By type of home: for a single-family home, the median price jumped 16.2% year over year to reach $ 317,100; and for condos, it jumped 12.3% to $ 280,500 (data via YCharts):

As with so many other economic indicators, the well-established seasonality of the median home price has been canceled out during the pandemic. In the past, it peaked in June or July (the highlights in the chart above), and it did so even during the housing crisis, then it would drop and hit the seasonal low in January or February. But in 2020, the median price peaked in October, then fell from November to January, and in February rebounded to the October level.

The Fed is smiling at the rise in long-term Treasury yields, a sign of economic growth and rising inflation expectations. Lily... First signs that soaring mortgage rates are reducing the heat in the housing market

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