Has the epic crash in existing home sales finally found a workable bottom to rise from? The 10-year yield will be our guide, as I discussed on CNBC very early in 2023.
Where the 10-year yield goes, so goes housing! I say this because of the slow dance between the 10-year yield and 30-year mortgage rates since 1971. Last year, the 10-year yield fell from 4.25% to 3.37%, pushing mortgage rates lower from 7.37% to 5.99%. That created three months of positive purchase application data and gave us one of the most significant month-to-month sales prints ever recorded in history: from 4 million to 4.55 million.
Where the 10-year yield goes, so does housing demand, so let’s talk about today’s existing home sales report.
From NAR: Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – fell 4.1% from September to a seasonally adjusted annual rate of 3.79 million in October. Year-over-year, sales tumbled 14.6% (down from 4.44 million in October 2022).
One of my talking points over the years is that it’s rare since 1996 to have existing home sales trend below 4 million. We had this happen in 2008, and it is happening now. This last push lower in demand can be attributed to mortgage rates getting above 8% and the 10-year yield spiking to 5%.
It’s not difficult to understand housing: higher mortgage rates create less demand, and lower mortgage rates create better demand. Recently, mortgage rates have fallen, and we have seen a pick-up in purchase application data. Just remember, purchase application data looks out 30-90 days, so if we get more consistent growth, it will be a few months before the total effect is shown in the sales data.
Below are a few charts to go along with the existing home sales report:
From NAR: First-time buyers were responsible for 28% of sales in October; Individual investors purchased 15% of homes; All-cash sales accounted for 29% of transactions; Distressed sales represented 2% of sales; Properties typically remained on the market for 23 days.
The days on market is a seasonal data line that falls in the first half of the year and then rises in the second half. My rule of thumb for the savagely unhealthy market is that we never want the days on the market to be a teenager or below; nothing good happens in housing when this occurs. This means that we either have a record boom in demand that will end badly, or we have too many people chasing too few homes. Looking at our housing data, it clearly was the second one this time around.
Since housing inventory has broken to all-time lows and we haven’t see the credit boom like the one during the housing bubble years, it’s all about active listings. Anything above 19 days is a good thing. I prefer to have days on market of at lest 30 days all year round, but clearly, I am not getting what I want this year on inventory.
From NAR: The median existing-home price for all housing types in October was $391,800, an increase of 3.4% from October 2022 ($378,800). All four U.S. regions registered price increases.
So when you see 21st-century demand lows and home prices rising year over year, just remember: 2022 was the craziest year ever in housing. In this recent podcast, I discussed what you need to see if you’re looking for a national home price crash. Simply put, for 2023, inventory is low, demand isn’t crashing like it did in 2022, and we have low distress sales. This is how national home prices got back to all-time highs.
Today’s existing home sales might be the cycle low in demand if the 10-year yield has indeed peaked. The history of bond markets and mortgage rates has been that if the market believes the Fed is done hiking, then mortgage rates head lower. How much lower they go depends on the economic data. I recently talked about what we need to look for in this podcast.
For the rest of this cycle, we will keep an eye on the labor data and other data lines and track the 10-year yield; the lower it goes, the more we can rise from these historically low levels of demand.
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