It’s The Inventory, Stupid! (Why Values Are Not Crashing)
Before I explain who I am calling “stupid,” I want to touch on numerous comments I received in regard to Monday’s Blog: Why Everyone Needs A House As An Inflation Hedge Now More Than Ever.
All of the comments reminded me that it is NOT just the house that is the inflation hedge, but it is the potential rental income too, as rental incomes rise with inflation as well.
It’s The Economy, Stupid!
The above subheading is the famous and very successful tagline that the Clinton campaign used successfully when Mr. Clinton ran for President in 1992.
And my blog heading today is just a takeoff from that.
The people I am calling “stupid” are those in the financial press who continue to insist a housing meltdown is imminent.
For a meltdown or crash to occur, we need to see an onslaught of inventory – and it is just not coming for a variety of reasons that are mostly discussed in this recent Bloomberg article: Here’s How Weird Things Are Getting In The Housing Market.
So, yes, inventory is building – but not by that much, and that is partially why Morgan Stanley’s Housing Strategist (quoted in the article) is only predicting a 3% decline in home prices.
This is what is keeping inventory tight:
- Mortgage Rate Lockdowns. This is the biggie, and it is the situation where sellers do not want to sell their homes because they have very low fixed-rate mortgages. They don’t want to sell a home with a 3% rate only to have to buy a new home with a 7% rate. This alone is keeping inventory far tighter than it otherwise would.
- No Forced Sales/Foreclosures. Today’s average equity level is an astounding 58%, so nobody with that much equity is going to let their home go into foreclosure. In addition, borrowers are much more qualified in general and most have very low fixed payments that they can easily afford. So, we will not see near the number of foreclosures that we saw after 2008, and, similarly, we will also see far fewer sellers who have to sell for affordability reasons.
- Builders Cut Back. Not only have builders been bringing new homes to market at a much slower pace than they were prior to 2008, but they have slowed that pace markedly in the face of higher interest rates and recession concerns.
The authors of the above Bloomberg article are not the only ones to bring inventory issues to light too, as my favorite macro pundit, Lyn Alden, recently tweeted this: “It’s funny because nobody with a low-rate mortgage wants to sell either…. People are looking for a nominal housing crash but outside of the most speculative markets, who is going to sell from their 3% 30-year mortgage?”
Here Is Some Data For Added Perspective
I borrowed all this from today’s MBS Highway market update:
- 1.1 Months of Supply: There are 462,000 homes for sale which looks like a 9.2-month supply. BUT – only 56,000 of those homes are actually completed, and that is only a 1.1-month supply.
- Canceled Contracts (not that bad): Per Redfin, 17% of contracts were canceled in September, and that is pretty scary… until we remember that approximately 15% of contracts cancel in hot markets too!
- Multiple Offers Still: Almost 50% of all homes listed are still getting multiple offers.
- 99.2% of List Price: Homes are still selling for 99.2% of their list price on average.
- Sales Are Down but Not by as Much as Projected: The number of home sales was down by 11% in September but that was 2% less than the 13% decline that analysts predicted.
Overall, the housing market remains more resilient in the face of much higher rates than almost every analyst predicted.
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