Three Reasons the Housing Market is About to Get Worse

If you follow news in the housing market, you may have seen that existing home sales transactions have fallen 20% year over year in July and August of 2022. The median sales price for existing home sales has also decelerated from growing 16% year over year at the end of 2021 to growing just 8% year over year by August of 2021. According to Redfin, A number of metros are already seeing year-over-year price declines, including New Orleans (-5.7%), Oakland (-2.1%), and San Francisco (-1.9%). As bad as things are in the rapidly decelerating housing market, it is clear things are going to get worse. Three key leading indicators all point to further weakness ahead.

1) Purchase Mortgage Applications

Though the financial press likes to report changes in existing home sales, the more important leading indicator to follow is purchase mortgage applications. Today’s mortgage application is next month’s pending home sales and the following month’s existing home sales. Mortgage applications are in free fall. The year-over-year rate of decline has worsened from down 8% in February to down nearly 40% in recent weeks.

2) Homebuilder Sentiment

Another important indicator is homebuilder sentiment, which is derived from a monthly survey of the largest homebuilders in the nation. Homebuilder sentiment has dropped every single month of 2022 and has been more than cut in half from the end of 2021. The survey is based on both current buyer traffic and the outlook for the next six months. The rapidly deteriorating scores indicate that homebuilders are increasingly pessimistic about the housing market near term.

The survey also has geographic data which shows that the Western region is by far the weakest region in the United States.

Poor homebuilder sentiment translates into lower construction activity and new housing starts in the following months. Housing is a significant part of the economy, and this has negative downstream impacts on everything from raw materials such as lumber to finished goods such as furniture, appliances, and mattresses. The weakening housing market will become an increasingly large drag on the US economy.

3) Mortgage Rates

Mortgage rates are the lifeblood of the housing market and it is no surprise that spiking mortgage rates have crashed the housing party. The following chart from Zillow shows that 30-year mortgage rates have more than doubled to nearly 7%. The housing market works on a lag and the most recent increase in mortgage rates will be only felt in the coming months.

Conclusion

So what do we get if we put all these things together? 2023 will clearly be a buyer’s market. Though housing experts seem reluctant to predict declining housing prices, I think there is a high probability we will see nationwide housing price declines in 2023. Mix in a potential recession and it is very possible for some markets to see 10-20% year-over-year price declines in 2023.