Peak Housing Inventory For the Year, Sub-2008 Purchase Applications, and this Week Ahead in the Markets

For all the people screaming that the sky is falling and the housing market is going to collapse have been relatively quiet lately.

Let's talk about some of the real estate metrics that have come out recently, draw some conclusions from them, and then talk about what to look out for in the week ahead.

Housing Inventory

It looks like the peak in housing inventory for the year is behind us based on the above chart from Altos research.

The inventory decline isn't too crazy; after all, housing inventory is seasonal. If you look at the years before the pandemic, you can see that inventory naturally rose over the summer and declined in the winter.

The increase in rates took the frenzy out of the markets and restored some semblance of order.

So why is this significant?

All the real estate bubble proponents made claims that housing inventory would explode and the market would be flooded with distressed inventory once the Fed hiked rates.

Indeed, inventory is up quite a bit: 49% YoY to be exact.

However, if we take into account the historical context, we can see that the peak of inventory wasn't even close to the amount of inventory we had pre-pandemic.

Here's the new listing data, courtesy of Altos Research. We can see that new listings are trending downwards as well, which works to continue to decrease inventory leading into the winter.

To counter balance this decrease in supply for the year, we also have decreasing demand. Let's look at that next:

Purchase Application Data

We can see that the current purchase application data lines up with the trough after 2008 and is roughly the same as the trough in purchase applications in 2014.

We can very clearly see that higher rates had a massive negative effect on purchases, so we can quantitatively say that demand has decreased.

Based on the analysis of one of my favorite Twitter follows Logan Mohtashami from Housing wire, these two metrics are actually correlated; generally, a seller for a home is also a buyer. When sellers are not confident that they can buy another property, they won't list their homes. Therefore, as demand decreases, new listings decrease, which can actually lead to a decline in inventory depending on the relative magnitude of the supply/demand decreases.

Here are some more of Logan's thoughts for a deeper read.

What About Prices?

While prices have come off of their peaks in almost all markets, the median housing price is still up in almost every market year over year (an example of the exception to this is San Jose, which is down a whopping 0.88% in it's median housing price from last year).

The relevant metric to look at here is the dark red Median Home Price line. As we can see, although prices are declining, prices are still up YoY, and will end the year up.

Based on all the information I've seen so far, i think it's safe to say that we'll probably see modest declines in house prices moving forwards. It absolutely won't be a crash like 2008, like some are claiming.

I think we also need to be cognizant of where rates are going too. For example, if the Fed decides to pull a surprise pivot and rates drop back into the 5s, I think a significant amount of demand will jump back into the Single Family market and will stabilize prices.

We already saw some downward movement in rates after the latest CPI data; rates came down 60 bps to an average of 6.62% for the 30 year mortgage.

The Week Ahead

To summarize, it all comes down to rates (no surprise there). If rates go back up another 100bps, demand will drop relative to supply and we'll continue to see prices fall.

However, if the spread between the 10 year treasury and the 30 year mortgage falls, or rates in aggregate fall, we could see a boost in demand in a generally declining supply which might lead to a stabilization in prices nationally.

To predict where rates are going, what should we look out for this week?

For one, Jerome Powell is speaking on Wednesday. I expect him to reiterate his hawkish statements that I described in one of my previous posts. Based on those comments, I expect rates to tick up a bit and markets to fall.

It's been my prevailing opinion that markets have been a bit too optimistic when it comes to pricing in what the Fed will do.

Another important thing we need to look out for is the payroll data this week. The current expectation is for 200,000 additional jobs to be created.

If we're hoping for less rate hikes, we want to see the new jobs come in materially below 200,000. In addition, we want to see wage growth moderate. Given that the last 6 jobs reports have come in better than expected, I'm bracing myself for this one. Given the surprising previous CPI reading, maybe this jobs number will actually come in lower. We'll have to wait and see.

That's all for this week! I hope everyone had a great Thanksgiving!