Commenting on the Renewed Plunge in Existing Home Sales, NAR economist Lawrence Yun Blames Mortgage Rates.
“The housing market is obviously very sensitive to mortgage rates. Softer sales in December reflected consumer search processes and contract signing activity in previous months when mortgage rates were higher than today. Now, with mortgage rates lower, some revival in home sales is expected going into spring.”
Existing Home Sales 1970-Present
Existing home sales are about where they were in 1998 when mortgage rates were generally in the 6.5% to 7.5%. Today, 30-year fixed rates are under 4%.
Population-adjusted, these sales numbers are a disaster. Clearly mortgage rates are not the overriding factor.
Mortgage Rates Shifted 2-3 Months Forward vs Existing Home Sales
Existing home sales are recorded at signing. The purchase offer is typically 1-3 months prior.
Yun blames December weakness on “contract signing activity in previous months when mortgage rates were higher than today.“
In the above chart I shifted mortgage rates forward approximately 2-3 months forward so the sales more accurately reflect the interest rates at signing.
There are some long-term trends that hold, but there is no magnitude or scale that directly ties the two together.
2013 vs 2016
A decent spike in mortgage rates in 2013 correlates with a decent drop in sales. A similar spike in 2016 did nothing.
Mortgage Rates a Small Factor
Mortgage rates are a factor, but clearly not the most important one. Affordability, jobs, sentiment towards buying a home count more than mortgage rates.
If that were not the case, existing home sales would not be at the 1998 sales level with allegedly millions more people wanting a home.
Wage Growth
Wage growth has been anemic. Home prices have risen far more than wage growth. That’s what matters the most.
Shrinking Pool of Eligible Buyers
Each person who buys a home who can afford one, takes one person out of the pool of eligible buyers.
As long as home prices rise more than wages, the pool of eligible buyers shrinks.
Desire
Eligibility is not the only constraint. Desire is another. Millenials do not have the same attitudes towards assets, homes, cars, etc., as their parents.
Many live with their parents, taking care of them. Many are trapped by student loans.
Many saw their parents or friends’ parents lose their homes in the financial crisis and do not want to be in the same position.
Enormous Headwinds
Finally, it’s pretty clear the global economy is slowing. The US will not be immune.
Perhaps there is a short-term bounce, but perhaps we just saw it. The housing headwinds are enormous.
Mike “Mish” Shedlock
It is not just the size of the monthly mortgage payment that affects affordability.
Property taxes and homeowners insurance rates have gone THROUGH THE ROOF, and in many cases are now nearly equal to the monthly mortgage payment. I would claim that on this basis, affordability is at an all-time low, by a wide margin.
Economists, including Yun, are still out to lunch. We are still adding jobs and home sales are rolling over under the weight of UNaffordability. These are the good times. What will the professional economists say when we do actually enter an official recession and job growth craters? Oh, wait, economists never forecast a recession.
Given this is existing homes doesn’t the seller replace the buyer in the eligible pool of buyers?
Not if they we’re investment properties. I can’t count how many people I know that own 2-3 homes in my market.
Historically, the rate of people buying investment homes weren’t nearly as high as it has been for the last decade. That also skewed the numbers and the prices.
Good question.
Yun has consistently proven that his housing predictions are almost always wrong and he is a fool to boot.
The mortgage interest rate tax deduction is a gift to builders. It has resulted in raising the prices of housing while the electorate think they are getting a benefit from the tax deduction. Housing demand is low because as Mish states: student loan debt which is also exponentially growing like home prices. Home demand was still high when I bought my first house at 9% interest rates. Home prices were affordable compared to income levels and I did have student loans totalling 90k in 1988 dollars.
Lawrence Yun still works for the NAR because he regurgitates the govt propaganda he is told to.
How does Lawrence Yun still have a job at NAR?
Because it is always “Now is a great time to buy a house!”
The NAR is obviously biased toward positive hype. Mr. Yun does a fine job of it. His employment is secure.
I actually agree with him regarding a spring rebound though.
Same reason why David Lereah lasted so long….
Rising interest rates + new tax laws + the Great QE unwind + Mel Watt retiring = housing bubble popping and less houses being sold
With a $24,000 standard deduction for couples in 2018 and forward, there really is no tax advantage to buying a median home anymore.
Plenty of countries with no tax deductions for buying a house had YUGE housing bubbles.
Canada and Australia immediately come to mind.
You are right – for the first time in decades I was within $800 of taking the $24K deductible. It was only a large charity donation that put me over the top.
This got me thinking, if most people get the $24K deductible, they are likely to rethink their charitable donations. It used to be if I gave $200, it was basically net $100, but now, unless I’m sure I’m going over the $24K, a $200 donation costs me $200.
Churches and charities might be big losers from this change.
BTW, when I saw that there was no AMT this year I had a smile on my face that would have required surgery to remove. My Federal taxes dropped almost 30%!