Shortage and that meant home prices would not fall fast forward to today and home prices are falling in many areas of the country with all 20 major cities reporting price declines in December’s case Schiller report in this video we’re going to look at the real reason home prices are declining
And why these price declines will continue throughout 2023 over the summer we made a video discussing several leading indicators of home prices and said that home prices would turn down and potentially buy a large amount in late 2022 and early 2023 we’re now seeing Swift declines in many regions of the country specifically
Areas like Phoenix and Las Vegas two areas that have a very high volume of new construction which was the area of the market that we noted had very elevated levels of supply so let’s now review the state of the U.S housing market and what to expect in 2023
There are two housing markets in the United States there is the existing Home Market and the new Hall Market the existing Home Market is the buying and selling of homes with a previous owner and the new Home Market is the purchase of newly constructed homes the existing Home Market represents 85
Percent of all transactions so most people focus their attention on this Market the new Home Market while only 15 percent of all transactions is far more important for the overall economy because of the impact to the construction sector and construction employment we want to focus on the new construction
Market because this is what sets the tone for the rest of the housing market the builders and the speculators always get squeezed first and set prices on the margin in the existing Home Market there is only three months worth of inventory which is extremely low prices normally rise when inventory is this low
But in the new Home Market inventory is still very high at nearly eight months prices generally fall whenever inventory is higher than five or six months because the existing Market is bigger total U.S housing has about four months of Supply which is very low but home prices are still falling everyone got
This wrong because home building companies are like any other industry they will only keep inventory on their books for so long and then they will cut prices and move on when home builders slash their prices to move inventory eventually these price declines bleed into the existing Home Market even
Though there is still tight Supply this is exactly what happened in January both the average and median sales price for new homes declined by about 15 percent from the peak and the current declines that we’re seeing in the new Home Market are the second largest in the last 50
Years of data only exceeded by the 2008 crisis so in January prices fell and the month’s supply of new homes declined from 10 to 7.9 which shows that home builders slashed prices to drive an increase in sales also in January mortgage rates fell into the low six
Percent range even the high five percent range in some cases so the combination of lower mortgage rates and lower prices helped buyers in January and allowed home builders to move some of their stale inventory but where do we go from here are home builders going to cut prices more than
15 and will the existing Market follow in January the combination of a 15 price cut and lower mortgage rates caused an increase in affordability in February and early March though mortgage rates surged back towards seven percent buyers immediately felt the sudden decline in affordability and pulled back even with
New homes marked down by about 15 percent already applications for new mortgages fell to the lowest level since 1995. when we zoom out and look at the broader picture we see that the Federal Reserve is still raising interest rates and Contracting the money supply this is putting pressure on mortgage rates and
Buyer demand is slowing as a result the Federal Reserve and federal government injected a huge amount of money into the system but after we adjust for the increase in prices we can see that this money mountain is just about back to the long-term Trend level and it will
Certainly be below the trend level in the next few months what’s also interesting is that as soon as this excess liquidity started to get reversed right at the beginning of 2022 is when the momentum in the housing market stalled right now home builders still have too much Supply and are going to
See Supply numbers jump again as buyer demand slows under higher mortgage rates and a reversal of all of this excess liquidity so the factors that have contributed to the home price decline so far particularly on the new construction side are going to continue price declines will bleed slowly into the
Existing Market but will continue to be led by the areas of the country that had the most excessive and speculative Home Building
