December 22, 2021

Existing home sales rose 1.9% in November to 6,460 thousand after climbing 0.8% in October.  While sales have risen in each of the past three months, sales continue to be hampered by the lack of supply.  Potential home buyers simply do not have many houses to choose from, and of the ones available some will be too expensive, too big, too small, not in the right location, etc.  At the same time rapidly escalating prices are negatively impacting buys at the low end of the market.  Higher down payments combined with higher monthly payments are pricing some of the potential buyers for inexpensively priced housing out of the market.  Sales will rebound in the months ahead as builders find new bodies and step up the pace of production, but higher prices and higher mortgage rates will put a damper on the extent of the increase.

Lawrence Yun, NAR chief economist said that “Determined buyers were able to land housing before mortgage rates rise further in the coming months.  Locking in a constant and firm mortgage payment motivated many consumers who grew weary of escalating rents over the last year.  Mortgage rates are projected to jump in 2022, however, I don’t expect the imminent increase to be overly dramatic.”

Mortgage rates remain low at 3.1%  However, with inflation on the rise the 10-year U.S. Treasury note is  likely to rise from 1.6% today to 2.5% by the end of next year.  If that is true, then mortgage rates are likely to climb from 3.1% today to 4.2% by the end of 2022 and  higher still in 2023..  They are headed higher.  The only question is exactly how quickly they will climb.  Fear of higher mortgage rates ahead may entice some buyers to jump in now rather than wait.

As further evidence of the strong demand currently, the average home sits on the market for just 18 days.  That is essentially the shortest period of time between listing and sale ever recorded.  In fact, demand is so strong that 83% of the homes that came onto the market during November sold within a month.

One flaw in this relatively rosy scenario is that there are very few homes available for sale.  With a moderate increase in the number of homes sold and a small decline in the number of homes available, housing inventory  declined 0.4 month in November to 1.9 months which matches the record low level of inventory set at this time last year, and is far short  of the 6.0 month supply that is required to balance the demand for and supply of homes.

Home prices rose 0.3% in November to $353,900 in November after rising 0.4% in October.  The intense upward pressure on prices seems to be abating slightly.  This means that the year-over-year increase is now 13.9%. It shows what can happen to prices when there is such a severe shortage of available homes available for sale.

Housing affordability has dropped from where it was in the spring, but housing remains affordable for most buyers.  Home prices have risen sharply in the past year.   But there are two other parts of the housing affordability equation — mortgage rates and income.  After hitting a record low level of 2.7% mortgage rates have risen slightly to 3.1% which is still very low.  Meanwhile, income has been surging as a result of the tax refund checks being send to consumers as part of the COVID relief packages.  As a result  housing affordability has fallen from where it was earlier this year, but came in at 148.2 in October.  This means that potential home buyers had 48.2% more income than required to purchase a median-priced home.  In the go-go days in 2007 just prior to the so-called “Great Recession” this index stood at  115.  Indeed, at 148.2 the affordability index is roughly in line with where it was in 2018 and 2019 — prior to the recession So despite rapidly rising prices, most consumers are still easily able to afford a median priced home.

Having said that, some first time buyers are being shut out by the rapid price acceleration.  For example, the required down payment has risen from $54.600 in February of last year — just prior to the recession to $72,200. The monthly payment has risen from $984 to $1,235.  As a result, first time homebuyers accounted for 26% of sales in November which is down from 32% in November of last year.  Furthermore, even if the rate of increase in home prices slows, they will still be rising.  Meanwhile, mortgage rates will continue to climb.  It is likely that this housing affordability will decline to about 139 by the end of next year.  Still affordable, but probably enough to slow the pace of home sales to some extent.

Given all of the above we expect home sales to decline 0.8% in 2021 as the  pandemic took a toll, but then increase 4.5% or so in 2022 to 6,900 thousand.

Expect GDP to rise 8.0% in the fourth quarter and then climb by 4.9% in 2022..

Stephen Slifer

NumberNomics

Charleston, S.C.