The stock market may have proven time after time to be the world’s greatest wealth creation vehicle in modern history. But owning a home is perhaps the single best forced-savings vehicle for any American of any working age. One magic trick about being a forced-savings vehicle is that the owner does not even have to have a net profit over the life of a home for home ownership to be considered a success over time. So what happens when the economics of home ownership become inverted?
Oggonomics firmly stands behind the benefits of long-term home ownership. That said, the summer and second half of 2024 are setting up for a very difficult and challenging time in the U.S. housing market. High interest rates, a presidential election, a cooling job market and a softer economy are all culminating at a time when housing affordability is not favorable by any traditional metrics.
If the Federal Reserve doesn’t get around to lowering interest rates then it’s likely to make the flow of buying and selling homes even worse. The real problem is that most economists are no longer calling for a series of imminent rate cuts like they were hoping for early in 2024. And at publication, the 10-year Treasury yield was close to 4.50% and the 30-year Treasury was 4.55%. And the stronger jobs creation in the May 2024 payrolls data is keeping rates in the “higher for longer” camp.
There is of course a silver lining here for those with capital and those wanting a home. The upper-hand advantage looks to be firmly to the advantage of homebuyers as the summer 2024 housing season is underway. Most homes are now staying on the market for longer before selling.
Many potential home sellers are currently opting to not sell their homes to move. If you locked in a 3% mortgage, why shift to a 7% mortgage? If you have a home that is now slightly too large, why sell now just to turner around and spend all the sales proceeds on a move and a slightly smaller home?
Oggonomics has pulled data from multiple sources regarding the current U.S. housing market. The summer sales cycle looks riddled with problems for 2024. And on top of the issues already addressed there are high property taxes and all-time high costs to insure a home now.
It turns out that homebuilders are offering all sorts of incentives to close now. They are negotiable on price. They may be able to offer teaser interest rates to make a home more affordable for the first year or two of ownership. And with a housing shortage, now the only question for new and existing home buyers is whether the homes they would really want to buy are even available on the market.
NEW/EXISTING HOMES SALES “SLUMPING”
This is a time new and existing home sales should be escalating as families move over the summer to get locked into their schools. The National Association of Realtors is showing contraction as for the most recent data tracking April sales. Pending home sales were down 7.7% in April as escalating interest rates through April hurt home buying. This was even with more home inventory in the market. Another weak April reading showed that existing-home sales fell 1.9% in April.
FREDDIE EXPANSIVE OWNERSHIP… OR NOT
Freddie Mac is all about expanding home ownership in America, but their May 2024 outlook even started out explaining that U.S. economic growth has moderated and that the labor market has shown some signs of cooling. And for that pesky inflation, Freddie Mac also warned that the impacts of high inflation are weighing on growth.
Mortgage rates have risen handily from the sub-3% cycle lows before the Fed started hiking rates. But now, after 11 consecutive rate hikes, the average mortgage rate was above 7%. This is impacting a decline in home sales and in new construction alike.
HOMEBUILDERS SLOWER TRENDS
The National Association of Home Builders also shows some troubling info for the housing market. Those higher mortgages showed a negative influence on April’s new home sales. Housing “affordability” is now also the opposite of affordable as families now have to spend 38% of their income on a median priced new single-family home.
The NAHB data shows it’s even worse for low-income families. Those low-income families who earn half of the area’s median income would have to spend a whopping 77% of their earnings to pay for the same new home. And for existing homes, the typical family would have to pay 36% of their income for a median-priced existing home and a low-income family would need to pay 71% of their earnings for the same mortgage payment. And keep in mind that this doesn’t even take the significant cost of a down payment into consideration.
According to May 30 Redfin data, 6.4% of home sellers nationwide lowered their asking price during the four-week period ending May 26. This was the highest share since November 2022. Redfin also noted that the median asking price fell by about $3,000 to $416,623 in that same week for the first decline six months.
NORMALIZING SUPPLY OF HOMES FOR SALE?
There should be a worry that sellers just won’t list their homes. Realtor.com showed on June 4 that there now may be plenty of homes to consider buying as May marked seven months of growth as home inventory levels have risen sharply. Realtor.com even showed that there are 35.2% more homes on the market than this time last year. Here are some REALTOR notes for May 2024:
- national median list price rose 0.3% to $442,500 in May
- number of lower-priced homes is rising faster than other segments with 46.6% more homes on the market in the $200,000 to $350,000 range.
Still, this will show just how much things have changed from pre-covid levels — May’s typical listed home price was up a sharp 37.5% versus May 2019.
CENSUS ON STARTS/PERMITS
There is mixed data from the Census regarding housing starts and building permits. Starts means that the home building has broken ground, and permits leads to more new homes on the market six to eighteen months into the future. https://www.census.gov/construction/nrc/pdf/newresconst.pdf
Privately‐owned housing units showed 1,440,000 annualized permits, 3.0% below March’s rate of 1,485,000 and 2.0% below April 2023’s 1,470,000 annualized rate. Privately‐owned housing starts rose 5.7% in April to 1,360,000 but that is still 0.6% below the April 2023 rate. Single‐family housing starts of 1,031,000 were 0.4% below the March figure.
PRIVATE SECTOR HOME IMPROVEMENT BAROMETER
The private sector’s own home improvement retail giants offer a lot of insight as well. Home Depot, Inc. (NYSE: HD) and Lowe’s Companies, Inc. (NYSE: LOW) have both been weak for more than 60 days. Both Home Depot and Lowe’s have seen more than 10% drops in their stock price in the last sixty to ninety days. Neither is talking about a robust spending climate, and both companies have addressed customers experiencing sticker-shock and having to use more budgeting on projects. Another trend is that home repair spending is being prioritized rather than all happening under a single project at the current time.
