As we head towards the home stretch of 2023, I maintain my belief that two events are more likely than not to occur that will drag the economy into recession - a major credit event and/or the housing market going bust. We’ve got data suggesting that we’re already making progress on both fronts, but it’s the latter that presented some particularly strong evidence over the past few weeks.
A lot of people will point to the Case-Shiller home price index as evidence that the housing market is still fine (the national home price index just hit a record high in September). While that may be true for now, there are a few caveats to this. First, the index is a lagging indicator and could take time to catch up to current conditions and, second, it doesn’t reflect what’s going on in the commercial real estate space, which could ultimately be in much worse shape. Plus, do people really think that mortgage rates can go from 3% to nearly 8% in just two years’ time without a negative impact on the housing market?
The big shoe to drop just earlier this week was new home sales in the United States. Not only did the October number miss expectations by a wide margin, sales are now running at about the same rate as they were back in April.
This is important because it’s new homes and new construction that has driven the post-COVID boom in housing. New home sales continued to rise for a while even in the face of higher mortgage rates, but it looks like the momentum has finally stalled out. With some volatility along the way, sales have been flat for the past seven months. This shouldn’t be terribly surprising at all, although for some reason it seems to be sliding under the radar. With home prices still at extraordinary levels relative to their historical trends and higher interest rates significantly adding to the expense of financing those new homes, it was just a matter of time before homebuyers had finally had enough.
Here’s one of the biggest areas of concern for me. Perhaps the reason that new home sales are “only” flatlining instead of falling is because the cost of those new homes has already started coming way down.
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