December 13, 2022

Existing sales tumble amid housing downturn

U.S. existing-home sales plummeted 5.9% in October to a seasonally adjusted annual rate of 4.43 million, the ninth straight monthly decline.

Existing-home prices continue to moderate given the backdrop of higher mortgage rates and cautious buyers. The median price for an existing home fell to $379,100 in October from $384,800 in September. Nine marks the longest monthly streak since the measurement began in 1999.

Mortgage application activity has dropped to the slowest pace since 1997, according to the Mortgage Bankers Association. Existing homes are selling at the slowest pace since 2012.

Fannie Mae and the National Association of Realtors (NAR) expect prices to keep falling through 2023. But housing inventory also fell from August to September. So as fewer people opt to sell their homes, prices are hindered from coming down further.

The housing economy of today closely mirrors 1979, rather than the Housing Crash a decade ago. As the Federal Reserve has continued to aggressively attack high inflation with rising baseline interest rates throughout 2022, it has caused a surge in borrowing costs, which in turn hurt buyer demand.

In 1979, the Fed also raised rates to fight inflation due to oil embargos, and mortgage rates soared, followed by the global calamity of the 1980 Iran-Iraq war. Mortgage rates eventually soared near 18%. In 2022, inflation already worsened by the pandemic was closely followed by the Russian invasion of Ukraine.

Mortgage rates are based on bond trading, which rely heavily on Fed policy. While the Fed does not set mortgage rates, global economic factors combined with investor expectations of Fed policies eventually tend to “trickle down” and create close correlations.

Mortgage rates are still far below the 1979 rate but have more than doubled since January. Someone taking out a $300,000 mortgage last year at 3%, could only afford a $190,000 mortgage at the same monthly payment - a 37% decrease.

Equifax, a credit reporting company, expects mortgage originations declined more than 60% in the fourth quarter.

Fed officials expect higher interest rates to be needed in the long-term, though have signaled a willingness to slow the rate of increases. Policymakers hiked rates by another 0.50% in December to a range between 4.5% and 4.75%.

A wildcard for existing home sales is seller sentiment and activity. In fall 2022, seller sentiment declined as price growth expectations decreased and soaring mortgage rates reduced options for seller-buyers.

If they become more determined to sell as prices moderate, they may be more willing to accept concessions, or accept offers below the asking price.