US Housing Transactions Collapse

Demand for housing takes a nosedive as mortgage rates rise in conjunction with a general lack of affordability. Houses for sale are rising rapidly, which suggests we are moving from an environment of excess demand, seen since the start of the pandemic, to one of excess supply. This is bad news for home prices and ultimately, economic activity.

The housing market in the US was already looking to be in trouble as mortgage rates rise in a market where prices have increased 35% nationally over the last 2 years and saving for a deposit is a real challnge. The situation could transition from one of excess demand to one of excess supply. This will ultimately lead to a correction in house prices in the coming quarters. The new home sales number released today increases the probabilities of this situation playing out. There was a huge drop from March’s 709k (originally reported as 763k) down to 591k in April, more than 150k below the consensus 749k, which was very optimisitic.

Rising Mortgage Rates Hitting Demand

Tomorrow’s mortgage application data will be important given that weaker transactions  will mean weaker activity. If there is another big drop, which is possible given the surge in mortgage rates, we could see increasing fears on the economic impact. We've already seen home builders reporting a drop in new buyer enquiries and with rising costs and labour shortages, there isn't much incentive to start new building. Construction makes up 4% of the economy and retail sales of furnishings, furniture, building materials etc, all  correlate with housing activity.

Home Inventories Rising
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Inventory of homes for sale continues rising with nine months-worth of sales now sitting on the market – the largest proportion since 2010. Weakening demand and rising supply imply the possibility that house prices will soon peak and start to fall. Rising interest rates in an environment of falling home prices are not a good combo for consumer sentiment and these factors will ultimately increase the probabilities of a recession down the road.