WSJ- Economy is starting to look normal - Housing Isn't

WSJ- A recent article in the WSJ on the State of Housing. Some good points and we will dig into the details and where we think they nailed it or aren't digging deep enough. 

The Basics: 

If you haven’t tried to buy a home lately, the U.S. economy is starting to look kind of, sort of normal. But the housing market is still a mess, and it looks as if it will be that way for a long time.

Finally, the labor market has been moderating. Both job gains and wage growth, while still looking robust, have slowed. The unemployment rate, at 3.7%, is right at its 2019 average.

A lot of the distortions that came in the wake of the pandemic—a massive reshuffling of the job market, hefty government relief, huge savings stockpiles, soaring demand for goods, supply-chain distortions and skyrocketing inflation—look to have been largely wrung out.

Except for the housing market. Even with the retreat from the 24-year high set in late October, the average rate on 30-year mortgage, at 6.6% in the latest week according to Freddie Mac, is about 3 percentage points higher than before the pandemic. Prices are much higher too, with the National Association of Realtors on Friday reporting that the median existing, or previously owned, single-family home sold in December fetched $387,000, versus $277,000 in December 2019. Put the two together and affordability is far worse than before.

Weitz - I'm not sure many realize the drastic difference just 3% points can make when applying for a mortgage. For instance, lets talk a $600k loan which sadly isn't getting you a great home these days in the Seattle area. At a 3.6% interest rate, that loan over 30 years will cost the borrower approximately $2,727/ month (not including taxes, insurance, etc) according to mortgagecalculator.org. That same loan at 6.6% will cost $3,832. As you can see, the purchase power of the average income will get you far less home that it would have 3 years ago, yet prices have sky rocketed due to lower inventory as discussed in more detail below. 

A lot of the problem comes down to supply. With so many homeowners locking in low rates before and during the early part of the pandemic, they are loath to move and sell. Friday’s report showed the fewest existing homes were sold last year since 1995.

Weitz - This shows the issue. We have very low supply, and the lowest number of sales in 30 years. Sellers can't sell as they know they can't buy a new home at 6.5%+ and give up what is likely a low interest rate on their current home. Simply put, the market is in a stalemate. 

There is no quick solution here. Even if mortgage rates decline over the next year, they are unlikely to drop so much that they completely reverse the lock-in effect. Home builders are constructing more small homes at lower prices to serve entry-level buyers, and additionally large builders are offering “buydowns” that lower buyers’ mortgage rates. But building more homes isn’t as simple as throwing a switch.
Wednesday, the National Association of Home Builders said that its measure of builders’ single-family home sales expectations over the next six months rose to its highest level in January since July. The Commerce Department on Thursday reported that construction was started on a seasonally adjusted 1.09 million homes in the fourth quarter—the most since the second quarter of 2022.
Weitz- I love to see the inventory of homes coming on the market. That said, it could be a double sided sword. The more inventory that comes on the market, the more the market will be tested at exactly what the market will dictate for pricing with rates at current levels. 

Just because housing could add to GDP doesn’t mean what is happening with it is good. People unable to move for fear of losing their low rate payments, would-be buyers unable to find a home they can afford—these are problems. Even if the rest of the economy ends up looking healthy this year, housing won’t.

Weitz - overall, a solid article getting to the heart of the matter by the WSJ. It will be an interesting year to see how it all shakes out. I predict the areas where sellers can afford to liquidate / sell like 2nd home markets will be the ones where inventory increases, and we start to see where the supply/ demand truly is. Almost everyone I talk to says that we are going to explode higher if/ when rates fall. I think the unintended consequences of that will be increased inventory and we may actually have the opposite effect. 

For more information on mortgages rates and purchasing power, consider contacting a Lake Stevens Mortgage Broker. 

My Info:

Scott Weitz
Designated Broker; Snohomish Commercial Broker

Weitz Commercial
t: 206.306.4034
e: Scott@weitzcommercial.com