Today’s housing market has been in some deep doldrums by many standards, but the latest real estate statistics suggest something more serious might be ahead—that the market might be careening toward some sort of rock bottom. “Taken as a whole, this week’s data lines up with other indicators that are pointing to a potential bottom in housing market activity at a fairly low level,” notes Realtor.com® Chief Economist Danielle Hale in her most recent analysis. The only upside we can think of is that there’s typically nowhere to go from there but up. So, does that mean the worst days of real estate will soon be over? Not quite, since the big four harbingers of housing—home prices, inventory, days on the market, and mortgage rates—show few signs of a rebound yet. “They don’t yet offer a strong indication of how long the market will bounce along the bottom,” Hale explains. In other words, we might be floundering in this strange new netherworld for a while. Yet this does not mean it’s all hopelessness and despair down here. We’ll explore what this all means for both homebuyers and home sellers in our column “How’s the Housing Market This Week?” Rising mortgage rates’ harmful toll on the housing market The depths of winter actually saw some signals that homebuyers were feeling optimistic. The National Association of Home Builders reported recently that more people were out touring new construction with an eye to buy—for the second month in a row. Also, a measure of pending home contract signings jumped in January. This suggests that sales will be higher in coming months, since buyers and sellers sign a contract and then close on the deal several weeks later. But with mortgage rates surging higher, that burst of enthusiasm might be short-lived. According to Freddie Mac, interest rates on a 30-year fixed-rate mortgage averaged 6.65% in the week ending March 2, marking the fourth straight week of heading up. And that’s heavily weighing down homebuyers who are desperately fighting to keep their head above water, financially speaking. Home prices aren’t exactly cooperating, either. The yearly gains are moderating, which is an economist’s way of saying that they’re not rising as fast as they were, say, last fall. But they’re still rising—up 7.2% for the week ending Feb. 25 compared with that same week a year earlier. In February, the median price of homes for sale was $415,000. Compared with February 2022, it costs $630 more per month to pay for the typical home, which might be simply too much for some buyers to swallow. Why home sellers have given up Every week for the past nine months, fewer homeowners have listed their properties for sale than in the same period a year ago, and the final week of February was no exception. For the week ending Feb. 25, new listings were 16% lower than in 2022, meaning there’s less “fresh potential” for buyers, in the words of Hale. “Fresh” might be the keyword here. If you look at all listings and not just the newbies entering the market, there are actually more homes for sale in the market right now than a year ago—67% more, to be exact. But many of these properties have been on the market for much longer—by 19 days on average in the most recent weekly tally. The pace of sales has been slowing, in fact, for 30 straight weeks. This means buyers have already seen most of these listings and decided to pass. Yet despite this seeming glut of stale listings, it’s also important to remember that there are still only half as many homes for sale overall as there were before the COVID-19 pandemic. Another big-picture eye-opener? The housing market might be slowing, but it’s still faster than it was pre-pandemic. “Using time on market as a guide, today’s housing market is halfway between its most frenetic period one year ago and what was typical before the pandemic-era frenzy,” Hale explains. In other words, our whole frame of reference for what is considered fast, slow, surplus, or shortage in housing has changed. This shift in perspective might help “explain why both buyers and sellers are feeling lukewarm on this spring homebuying and selling season,” Hale says. So when will this dark period in housing end? “Mortgage rates will likely play a strong role in determining whether the market slows further or picks up speed,” Hale predicts.
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It's a first since 2012.
US home prices hit a turning point last month, dropping from a year ago for the first time since 2012, according to Redfin Corp. In the four weeks through Feb. 26, the median price for a typical home was $350,246, down 0.6% from the same period a year earlier, the brokerage said Thursday. The surge in borrowing costs last year slammed the brakes on the housing market, sidelining buyers and slowing sales. While price declines could bring some slight relief to consumers, higher mortgage rates are squeezing affordability and a lack of homes for sale could limit how far prices will fall. “Prices falling from a year ago is a milestone because it hasn’t happened since the housing market was recovering from the 2008 subprime mortgage crisis,” said Taylor Marr, Redfin’s deputy chief economist. “Prices will probably decline a bit more in the coming months, but first-time buyers hoping to score a major deal this year are likely out of luck.” Buyers are still getting squeezed. Mortgage rates are nearly double what they were at the same time last year. One measure, by Mortgage News Daily, showed the average for a fixed-rate, 30-year loan above 7%. Redfin anticipates that higher rates could lead to a “prolonged winter” for the market. “Limited inventory and continued interest in turnkey homes in desirable neighborhoods will keep prices somewhat propped up — and high rates will continue to be a hit on affordability,” Marr said. Is a rebound coming?
The contraction in residential mortgage lending activity continued in the fourth quarter of 2022 amid rising mortgage rates, consumer price inflation, and other signs of economic uncertainty, according to ATTOM’s latest report. When the average rate for a 30-year loan doubled to nearly 7%, lenders issued $476 billion worth of mortgages in Q4 – a 27% decrease from Q3 and a 57% decrease from Q4 2021. Within the overall activity, refinances represented just one-third of overall loans (496,221 mortgages) at the end of 2022, with refi dollar volume plunging 73% from $158 billion a year ago. Purchase loans comprised almost half of all loans (708,739 mortgages) versus about 30 early in 2021. “The lending industry experienced a triple-dose of hits in the fourth quarter of last year as mortgage rates kept rising to levels not seen in more than 15 years and the US housing market continued to stall after a decade of prosperity,” ATTOM chief executive Rob Barber said in the report. Even home equity declined 16% in the last few months of 2022 to a total of 313,973. The drop followed growth in five of the previous six quarters, according to ATTOM. “The severe contraction across the lending industry in the fourth quarter even hit HELOCs, which was the one major sector that had been holding up well earlier in the year as homeowners were using elevated equity from the real estate boom to finance home improvements and other things,” Barber said in the report. Barber noted that rates have settled back down a bit so far this year, which could lure some potential home buyers back into the market, especially if prices keep dropping, and spur some renewed refinance and HELOC action. “The direction of interest rates this year will dictate whether HELOC activity stays high as a portion of overall activity or household returns to cash-out refinancing deals to help pay for big-ticket expenses,” Barber added. Freddie Mac economist signals rates could reach 7%
Like the proverbial frog unwittingly relaxing in a pot of slowly boiling water, many have become desensitized to ever-escalating mortgage rates. Thursday offered a reminder of inflation-induced economic heat, as mortgage rates rose for the fourth week in a row. The 30-year fixed-rate mortgage averaged 6.65% in the week ending March 2 – up from 6.5% the prior week, according to data from Freddie Mac contained in the agency’s Primary Mortgage Market Survey. The average mortgage rate is based on mortgage applications Freddie Mac receives from thousands of lenders across the US. How high will mortgage rates go in 2023? “As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy,” Freddie Mac’s chief economist, Sam Khater, said in a prepared statement. ”However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward 7%. Lower mortgage rates back in January brought buyers back into the market. Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates.” In buttressing the commentary, Freddie Mac issued a pair of “news facts” in the aftermath of the higher rate:
Are mortgage rates rising now? To be sure, rates that had been on a downward trend after reaching 7.08% in November are now climbing back up. Adding heat to the economic stove, the Fed is expected to continue increasing its benchmark lending rate in its ongoing battle to tame inflation. While the Fed does not set the interest rates paid by borrowers on their mortgages, the central bank’s moves influence those rates. Mortgage rates typically track the yield on 10-year US Treasury bonds that are susceptible to actions from the Fed. Mortgage rates go up or down as Treasury yields do. Inevitably, reactions abounded after the latest rate increase. The Kobeissi Letter - an industry-leading commentary on the global capital markets – broke down the abstraction of rate increases in real terms, noting its impact on a $500,000 mortgage. Interest in that half-a-million-dollar home that would have been $220,000 in May 2021 is now $710,000, according to the site. “In 18 months, mortgage rates have risen from 2.5% to 7.1%,” the Kobeissi Letter noted. “Further, the housing affordability index is officially below 2008 levels. The well overdue housing market correction is on its way.” Indeed, mortgage applications have plummeted amid hikes to the 30-year fixed rate. The Mortgage Bankers Association last month reported a 13.3% decline in mortgage applications as purchase applications fell to their lowest level since 1995. Genevieve Roch-Decter, CFA, used the example of the impact on a median-priced home at a 7% rate. A down payment on a $467,700 home would require a $93,540 down payment with monthly mortgage payments of $2,514. “Is this doable for the average American?” she asked rhetorically. “No-one is selling real estate and getting rid of a 3% mortgage when interest rates are 7% today,” Andrew Lokenauth of BeFluentInFinance.com observed. “This is called the ‘golden handcuff.’ They are handcuffed to the property (financially tied to property due to low-interest rates), and not selling to keep it.” Annual home price gain seen in December was the slowest since August 2020.
US home prices continued to cool across the country, ending 2022 with a 7.6% slowdown in price appreciation rate. Home prices posted a 5.8% annual gain in December, down from 7.6% in the previous month, according to the S&P CoreLogic Case-Shiller National Home Price NSA Index. The 10-City Composite dropped to 4.4% from 6.3% in the previous month, while the 20-City Composite decelerated to a 4.6% year-over-year pace from 6.8%. CoreLogic chief economist Selma Hepp had her say on the CoreLogic S&P Case-Shiller National Home Price Index for December that went live this morning: “With a full year of data, S&P CoreLogic Case-Shiller Index once again proved that 2022 was incredibly volatile for the housing market,” she said. “By all accounts, housing markets experienced historic highs and lows in a matter of months. In December, the CoreLogic S&P Case-Shiller Index posted a 5.8% year-over-year increase, marking the eighth straight month of decelerating annual home price gains and a 15-percentage point slower rate of growth than at the peak in May 2022. “In contrast, December’s annual gain was the slowest since August 2020. Home prices are down 4.4% from spring peak to December, with four times larger declines in San Francisco and Seattle. New York, Cleveland and Chicago are faring relatively better, with total declines at only 3% through December.” Craig Lazzara, managing director at S&P DJI, commented: “The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers. Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.” Lazzara noted that the West coast was the weakest region, with San Francisco reporting the highest decline of -4.2% year-over-year. Miami, Tampa, and Atlanta were the strongest performers, while the Southeast and South were the strongest regions. “While the rapid reversal of price growth is evident across markets, West and Mountain West continue to lead with declines while some recently hot markets, such as Tampa, Florida, Dallas and San Diego, are rapidly catching up,” Hepp added. “Interestingly though, despite recent price declines, the national annual average growth of 15% for 2022 is still the second highest on record.” Loss comes just under two years since company went public.
Compass Inc. posted a net loss of $158 million in the fourth quarter amid a backdrop of inflation-induced volatility that has impacted the entire industry. The loss comes just under two years after the company went public in April 2021. The fourth quarter loss was $4 million more than the previous quarter’s loss but an improvement over the $175 million in losses posted in the comparable period in 2021. Company officials detailed the financial performance during a Tuesday earnings call, noting that the net loss included non-cash expenses such as stock-based compensation and depreciation accounting for a combined $82 million in the fourth quarter. For the year, the New York City-based real estate broker posted a net loss of $602 million in 2022 – up from $494 million in 2021. In the mix was $281 million in cash expenses, including $49 million going toward one-time restricting costs and another $11 million for litigation fees. Moreover, some $321 million was incurred in non-cash, stock-based compensation expenses and depreciation. Will 2023 be a good year to buy a house? Robert Reffkin, founder, chairman and CEO, didn’t sugarcoat the challenges: “2022 was a very difficult year in residential real estate, with the industry seeing one of the sharpest declines in transaction volume in decades,” he said. But he chose to focus on the company’s robust revenues during an earnings call with shareholders. “I am pleased to report that Compass revenue for 2022 was just over $6 billion, down 6% compared to 2021, which was our best revenue year ever and the best year in the industry on a volume basis,” he said. “This is a major accomplishment when you consider transactions declined industrywide 18% year over year.” He compared the impact to that of the Great Recession: “The 2022 industry decline in units was as bad as the Great Financial Crisis when the number of units fell by 18% year over year from 2007 to 2008,” he said. “While 2022 was a tough year for the housing market, particularly in the fourth quarter, we responded to the challenging market conditions by taking the initiative to reset our cost base.” What are the ways to reduce expenses? He described strategies taken to maximize opportunities this year: “We took decisive steps throughout 2022 to reduce expenses and drive operating efficiencies in the business with a very specific goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023. As the market deteriorate fast, we moved quickly to respond and initiated cost-cutting actions that reduced our non-GAAP operating expenses by $338 million, which is 23% less on an annualized basis from the second quarter of 2022 to the fourth quarter of 2022. “We shared on our third quarter call that we intend to develop and implement a plan to further reduce our non-GAAP operating expenses to a range of $850 million to $950 million. As we reported in early January, we believe our actions make it possible to achieve below the middle of the $850 million to $950 million range of annualized operating expenses by the fourth quarter of 2023.” He described further steps the company is taking to mitigate the potential for future losses: “As a result of investments in prior years, even at this reduced level of operating expenses, we continue to invest in growth and technology to further strengthen the company during this downturn in the market. We are seeing industry forecasts for negative volume of 22.6% from Fannie Mae, negative 18.6% from MBA, and negative 12.6% from NAR. We expect to achieve our goal of being free cash flow positive in 2023 at each of these levels. We are confident that this is the right level of non-GAAP operating expenses.” More cost-cutting measures may be in the offing: “However, as we have demonstrated throughout 2022 and into 2023, we are prepared to move swiftly to implement additional cost cuts if the markets turn out to be worse than expected. Our employees have worked incredibly hard to reset our cost base over the last 12 months. We believe it’s the right cost base. We continue to differentiate ourselves through our technology platform.” Greg Hart, chief operating officer, offered additional insight: “The challenging economic headwinds facing the residential real estate industry grew stronger in the fourth quarter of 2022. But as Compass has done throughout our history, our core business has continued to outperform the industry based on our ability to continue to add agents, improve our technology advantage and maintain our industry-leading principal agent retention of over 90%. The good news is that with our expense reductions taking hold, we are operating the business more efficiently today, and we’ll continue to drive further efficiencies as part of our everyday go-forward strategy.” As 2022 deteriorated the industry, Hart said the company took drastic measures to keep costs down: “After a great 2021, unfortunately, and unexpectedly, 2022 turned out to be the worst year for residential brokerages in decades as aggressive Fed actions drove mortgage rates from an all-time low of about 3% to a 20-year high in excess of 7% in a matter of months, bringing transaction activity down sharply. As a result, we had to bring our cost structure in line with reduced top-line revenue, making 2022 a challenging year from a personnel standpoint. When the revenue growth that we and the rest of the industry expected for 2022 did not materialize, we had to make the difficult decision to reduce headcount, taking actions in June, September, and at the beginning of January of this year.” Additional measures were taken: “When it became apparent early in 2022 that revenue growth could be challenged, we paused our expansion into new markets and also halted all M&A activity,” he said. “As the year progressed, we eliminated cash and stock agent sign-on bonuses of any kind, driving a more profitable approach to growth. We always intended to move deeper into our existing markets by attracting the agents in the top 50% in those markets. This would allow us to evolve the mix of agents over time to improve our gross margins. “The market conditions of 2022 accelerated that move. Since August, we have been successful in attracting more than 1,000 agents who have come to Compass without cash or stock sign-on bonuses. To put this in perspective, the number of agents in the industry is now contracting according to NAR. Competition for agents is fierce with some of our competitors still willing to pay large incentives to attract agents. “Yet we also see that in the midst of these difficult economic times, maybe agents are delaying these to new agencies. In Q4 of 2022 in the midst of a very difficult quarter for the industry, our average number of principal agents increased by 112 principal agents. Our average number of principal agents increased to 13,426, representing a 10% growth year over year in the fourth quarter. For the full year, we grew our average number of principal agents by 18% compared to 2021.” It is the second straight monthly downturn.
Consumer confidence dipped for the second straight month as stubborn inflation and anxiety over a potentially slowing economy weighed on Americans. The Conference Board reported Tuesday that its consumer confidence index slipped to 102.9 in February, from a reading of 106 in January. The business research group’s present situation index - which measures consumers’ assessment of current business and labor market conditions - ticked up to 152.8 from 151.1 last month. The board’s expectations index - a measure of consumers’ six-month outlook for income, business and labor conditions - tumbled to 69.7 in February from 76 in January. A reading under 80 often signals a recession in the coming year, the Conference Board said. Consumers have been a pillar in the US economy, not ready to slow spending even as the Federal Reserve tightens its monetary policy and signals more rate hikes ahead in its effort to cool the economy and bring down persistent, four-decade high inflation. Those rate increases can raise the cost of using credit cards or taking out a loan for a house, car or other purchases. Earlier in February, the government reported that retail sales jumped 3% in January following a two-month slide. Americans boosted their spending at stores and restaurants at the fastest pace in nearly two years. But that confidence could be waning. The board says consumers appear to be showing early signs of pulling back their spending, particularly on big-ticket items like cars, major appliances and homes. Plans to take vacations were also dialed back in February. Earnings reports from major retailers this month have echoed consumer anxiety. While Target, Home Depot and others largely met Wall Street’s quarterly sales and profit expectations, they have cut their forecasts for 2023 with inflation lingering longer than expected. “The strong jobs market continues to boost consumers’ spirits, but they see trouble ahead in categories that affect them most: jobs and incomes,” said Robert Frick, an economist with Navy Federal Credit Union. “Confidence is now strongly linked to high inflation, and if inflation falls this year as most forecasts suspect, we could see a commensurate rise in confidence.” The Fed’s preferred inflation gauge rose last month at its fastest pace since June, an alarming sign that price pressures remain entrenched in the US economy and could lead the Fed to keep raising interest rates well into this year. Respondents to the Conference Board’s survey continue to express optimism about the stability of their incomes and the broader US job market, which has held up well even as the Fed has ratcheted up its benchmark borrowing rate eight times in the past year. The unemployment rate fell to 3.4% in January as businesses added a whopping 517,000 jobs in the first month of 2022. There are still nearly two jobs for every unemployed American and despite high-profile layoffs in the tech sector, applications for weekly jobless benefits remain low. One thing Americans are not in a hurry to do is jump into the housing market. With an average long-term US mortgage rate of 6.5%, many potential homebuyers have been pushed to the sidelines because those higher rates mean hundreds of dollars a month in extra costs. The National Association of Realtors reported last week that home sales in January fell for the 12th consecutive month to the slowest pace in more than a dozen years. January’s sales cratered by nearly 37% from a year earlier. Find out how much prices are down from their peak…
Home prices in the US declined for a sixth straight month, sending a key index of values down 2.7% from its peak in June. Prices nationally fell 0.3% in December from the month before, according to seasonally adjusted data from S&P CoreLogic Case-Shiller. Buyers pulled back from the market toward the end of 2022, slammed by mortgage rates that had more than doubled since that January. Affordability had already been stretched by prices that soared to record highs throughout the pandemic. As the boom fizzled and sales declined, the total value of US homes tumbled by $2.3 billion in the second half of the year, according to a report last week by Redfin Corp. With competition easing, home shoppers who were determined to seal a deal gained a little leverage in negotiations with sellers. Prices in December were still higher than they were a year earlier, but the pace of gains has cooled. The national index, not seasonally adjusted, was up 5.8% annually, down from the 7.6% gain in November. Not all areas saw year-over-year increases. Prices fell 4.2% from December 2021 in San Francisco, and 1.8% in Seattle. Slightly lower mortgage rates at the start of the year gave buyers some incentive. Contracts to purchase previously owned US homes rose 8.1% in January from December, the biggest jump since June 2020, the National Association of Realtors reported Monday. But the path ahead for housing may be bumpy heading into the key spring selling season. Borrowing costs have climbed through February, and the Federal Reserve has signaled it’s inclined to continue hiking its benchmark rate to battle inflation. That’s likely to keep a lid on demand from would-be buyers and discourage current owners with low-rate mortgages from listing their properties. At the same time, homes that are on the market have been lingering longer, which may push sellers to resort to deeper discounts. “The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers,” Craig Lazzara, managing director at S&P Dow Jones Indices, said in a statement Tuesday. “Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.” Home loan application activity edges down after brief revival last month.
After a brief uptick in January, mortgage application activity dropped for the third consecutive time as rates continued to climb in recent weeks. Home loan application volume fell 5.7% on a seasonally adjusted basis, according to the Mortgage Bankers Association’s latest market composite index report. On an unadjusted basis, the index was down 4% week over week. “The 30-year fixed rate increased to 6.71% last week, the highest rate since November 2022, which drove a 6% drop in applications,” said MBA deputy chief economist Joel Kan. “After a brief revival in application activity in January when mortgage rates dropped down to 6.2%, there have now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month.” Kan added that data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates. Refinance applications posted a 6% decrease from the previous week, and purchase application volume slipped 3% week over week. Subsequently, the refi share of mortgage activity declined seven basis points to 31.8% of total applications. “Both purchase and refinance applications declined last week, with purchase index at a 28-year low for a second consecutive week,” Kan said. “Purchase applications were 44% lower than a year ago, as homebuyers again retreat to the sidelines as higher rates crimp affordability. Refinance applications account for less than a third of all applications and remained more than 70% behind last year’s pace, as a majority of homeowners are already locked into lower rates.” |
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