The Fitch rating agency also predicts a nominal 5% drop in US housing prices. This means that prices will fall by 5% regardless of inflation, which in real terms will result in an even greater decline in property prices.
Analysts and authorized firms state that the US real estate market is increasingly close to suffering a hard landing, and although experts rule out a crash like the one in 2007-2008, some leading market indicators predict a significant 'peak' in housing prices and real estate activity in general, which in turn could exacerbate the foreseeable recession that the US will face in the coming quarters.
The pending home sales index (PHSI) plunged 4.6% in October, with a year-on-year drop in pending transactions approaching 37%, the largest decline in the history of this figure, according to the Spanish financial newspaper El Economista.es.
This indicator is closely followed by investors and economists because it often anticipates movements in the real estate market, both in terms of prices and overall activity within the sector. The National Association of Realtors (NAR), the organization that publishes this indicator, explains that the pending home sales index is a leading indicator for the housing sector, based on pending sales of existing properties.
A sale appears as pending when the contract has been signed, but the transaction has not yet been finalized. The sale is usually completed within one or two months of signing. When this indicator drops sharply, it's because buying and selling activity is beginning to slow down for some reason.
Fitch Ratings, in a el inmobiliario report published this week, notes that "demand in the US will continue to decline through 2023, further eroding home prices. Materially higher mortgage costs (the average payment has increased by more than 50% since 2021) will affect first-time buyers and those looking to upgrade their property." The report adds, "Real estate investors have begun to pull back and will remain on the sidelines through 2023.".
A flood of negative data
The deluge of data published each month onel inmobiliario reflects the same trend, although within the vast array of negative indicators, the October existing home sales figures, released in mid-November, stand out. This is another key NAR statistic for studying the market, since existing home sales—recorded when a contract is signed—represent approximately 90% of US housing.
In October, existing home sales fell for the ninth consecutive month. Contract closings declined 5.9% to an annualized rate of 4.43 million for the month, the slowest since May 2020. Sales of single-family homes fell 6.4% month-on-month, reaching their lowest level since May 2020. The year-on-year figures are alarming: all existing homes saw a 28.4% decrease, while single-family home sales fell 28.2%.
This aligns with the model developed by analysts at Apollo IM, who project a nearly 24% drop in sales of existing single-family homes in the months since the Federal Reserve began raising interest rates again this spring. This is the most aggressive and shortest decline in sales since the first rate hike in a Fed rate-easing cycle, according to historical records compiled by the asset manager's researchers, which in this case go back to the 1970s.
The year-on-year drop is the largest in US history
Home sales have fallen every month since February, marking the longest streak of declines in data dating back to 1999 for the National Housing Amounts Report (NAR). The Fed's efforts to combat inflation through interest rates have fueled a rapid rise in borrowing costs, crushing demand and putting homeownership out of reach for many families.
“More potential homebuyers were priced out of the mortgage market in October as mortgage rates rose,” said Lawrence Yun, chief economist at the NAR, in a statement following the release of the data. “Mortgage rates have fallen since peaking in mid-November, so home sales may be nearing their bottom in the current housing cycle.” Mortgage rates have recently slipped below 7%, but they remain extremely high, and analysts are not optimistic. It's worth noting that at the beginning of 2022, these rates (typically the 30-year fixed rate) were around 3%.
"Existing home sales fell 5.9% month-on-month to an annualized 4.43 million in October, a 32% drop from the peak reached earlier this year. The decline in sales reflects a further deterioration in buying conditions, as rising mortgage rates have pushed affordability to its worst level since 1985," summarized Sam Hall of Capital Economics after the October figures were released.
Under pressure in 2023
“We expect home sales to remain under pressure for most of 2023, weighed down by eroding affordability, the recession, and a still-tight supply,” predicted Nancy Vanden Houten, chief US strategist at Oxford Economics, after the release of the existing home sales data. “We expect annual house price growth to turn negative in 2023, bottoming out at -5% year-on-year in the second quarter,” she added.
The Fitch ratings agency also predicts a nominal 5% drop in US home prices. This means that prices will fall by 5% regardless of inflation, which in real terms will represent an even greater decline in property prices. "With a divided US Congress, any intervention to improve housing affordability would have to come from the banks, as significant government support is unlikely. Regions that experienced the greatest gains in home prices since the pandemic are expected to suffer more severe declines than the national average," these experts maintain.
Andreas Steno Larsen, former chief strategist at Nordea, believes that "based on their models, a 15-20% decrease in the residential price index maintained by the Bank for International Settlements (BIS) seems likely." The BIS has one of the longest and most comprehensive historical series of house prices available, based on data from central banks, private institutions, and national statistical institutes. According to this database, year-on-year house prices in real terms (adjusted for inflation) already fell in the second quarter of 2022 in countries such as Sweden, Finland, Denmark, and Spain, but remained positive in the US.
According to Hall of Capital Economics, the rise in mortgage rates to 7% in October means sales have even more room to fall: “The rise in interest rates triggered another decline in mortgage applications for home purchases in October, which typically lead existing home sales by a month. Based on this, we expect existing home sales to fall to around 4.2 million annualized by the end of 2022.”.
Sam Hall (Capital Economics): "House prices will need to continue falling over the next year for homeownership to be a realistic option for most households."
“Looking ahead, affordability constraints will continue to weigh on sales next year, and buyers will also face other limitations. Given our forecast of a sustained decline in house prices, we expect banks to maintain tight lending conditions, which will price many buyers out of the market. And with the economy heading into a mild recession, buyers will be cautious about purchasing a home,” Hall added, emphasizing that “2023 will be the weakest year for existing home sales since 2011.”.
A few days later, the September reading of the closely watched Case-Shiller House Price Index . Although with a clear delay, the numbers confirmed the evidence. After seasonal adjustment, the generic Case-Shiller index registered a 0.8% month-on-month drop in prices in September. On an annual basis, this means that growth fell to 10.6%, from 13.0% in August. And this is taking into account that the Case-Shiller is an average of the data from the last three months, so this publication does not reflect the full impact of mortgage rates rising above 7%.
“House prices will need to continue falling over the next year for homeownership to be a realistic option for most households. With this in mind, banks are likely to restrict the availability of higher loan-to-value products to reduce the risk of negative equity. This will put further downward pressure on purchasing power and prices,” Hall diagnosed in another, more recent analysis. The expert expects the annual rate of house price growth to turn negative in early 2023 and for prices to fall by 8% from peak to trough.
Impact on the economy
Theel inmobiliario downturn could take a toll on the American economy. Residential investment will drag down US GDP, while the drop in home prices will impact household spending decisions through the wealth effect. The decline in housing, the primary asset for households, typically triggers reduced consumption, as families tend to save to offset the decrease in the value of their assets. As Steno Larsen points out, citing data from the National Association of Home Builders (NAHB), housing represents between 15 and 18% of the country's GDP, thus remaining "the main engine of the American economy.".
Allianz expects the housing market to contract by 6.3% this year and another 6.4% next year, but this would only reduce annual GDP growth by 0.2 percentage points. However, real estate services have a much more powerful impact. A reduction in this activity and the fall in prices could significantly reduce the added value this sector generates for the economy. According to Allianz's calculations, the housing market correction could reduce GDP by up to 1.7 percentage points by early 2024, increasing the risk of a more prolonged recession.
“The weak economic outlook also points to further declines in house prices. As rising interest rates slow economic activity and reduce employment, households will be reluctant to part with their savings and make a major purchase like a home. Negative expectations about house prices will also persuade many to postpone buying,” says Hall of Capital Economics.
An indicator from the aforementioned NAHB recently served to confirm the uncertain medium-term future of the American economy. Its Housing Market Index (HMI) showed a latest reading, published in mid-November, of 33 points (below 50 is considered contractionary). Experts' concern regarding this lack of confidence among builders stems from the proven correlation between a sharp decline in the index and a rise in unemployment, which typically occurs 9-12 months later.
Analysts' forecasts of unemployment rising to the 6-8% range from the current 3.7% within that timeframe have fueled recession fears for spring 2023. Applying the so-called Sahm Rule, one of these strategists, Alfonso Peccatiello, strategist at The Macro Compass and formerly with ING, placed the start of the recession in the second quarter of next year, specifically pointing to May.
Source: El Economista.es
