Is U.S. Housing Hitting a Ceiling?
Existing Home Sales numbers for the month of January will be released this AM. We can expect US home sales to be down, due in part to seasonal cold winter weather, but more significantly due to cold hard facts.
Pending Home Sales, a leading indicator of actual home sales based on contract signed, typically one to three months before actual sales appear in the existing home sales numbers, are down 8.7% and 8.8% month over month and year over year respectively, the lowest level since Oct 2011. And mortgage applications are down 6.3%. It tough to have home sales actually close without these pre-requisites.
This is part of an important trend we’re seeing in US housing. Only a few years ago we were talking about the bottom. Now it’s all about hitting the top, shifting from a seller’s to a buyer’s market.
There are several reasons for this. Some are temporary, others more persistent and troubling.
For example, housing inventory has been low for some time and is currently at around 4.6 months worth of supply where 6 months would be considered normal. But millions of owners are coming out from underwater and able to sell, builders have been building more new homes and investors may cut back home purchases as rental rates also hit ceiling across the country and home appreciation slows from double annual digits and nears a more normal 3% annual average (though recent developments in the area of institutional scattered residential rental investors now securitizing renal income cash flow could take on a life of its own, but that’s another blog post).
Tougher loan requirements with the onset of Dodd Frank Qualified Mortgage rules January 10th and in particular the 43% debt to income rule is another reason US home sales are shifting. By some counts, 15 to 20% of buyers who qualified before January 10th don’t qualify now. This too is more of a temporary issue for housing as lenders design new (subprime?) products and regulators find a better balance.
The bigger more concerning challenge for US home sales and values is jobs and wages which at this point significantly lag the home price growth we’ve already seen. A stable housing market depends on home appreciation being tied to area median income. Right now that tie is a chain around housing’s neck.