The housing market may feel out of whack to home buyers coping with fast-rising home prices and 7% mortgage rates. But like it or not, the housing market is in the pink of health.\u00a0<\/p>\n
Several economic indicators that measure housing activity \u2014 from home prices to sentiment surveys \u2014 show that home builders and sellers (the few that are out there) are finding strong demand from home buyers.\u00a0<\/p>\n
News of the housing market\u2019s relative health may be welcome to some \u2014 like real-estate agents and investors \u2014 but it\u2019s becoming a concern for economists. The more buoyant the housing market, economists say, the more likely the U.S. Federal Reserve will unveil another interest-rate hike, which further heightens the risk of a recession.<\/p>\n
\n \u201c<\/span>\u2018The housing market has started to recover, and this is a problem for the Fed because more demand for housing will boost home prices and rents.\u2019\u201d<\/span>\n <\/p>\n \u201cThe housing market has started to recover, and this is a problem for the Fed because more demand for housing will boost home prices and rents,\u201d Torsten Slok, chief economist at Apollo, wrote in a note in May. And housing is a big part of how the government measures inflation, he added. This will make it more difficult to reduce inflation from 5% to the Fed\u2019s 2% inflation target, he said.<\/p>\n If the Fed launches another rate hike, it would push mortgage rates, which are already in the 7% range, to go even higher.\u00a0<\/p>\n \u201cThe housing market is in a very \u2014 if fragile \u2014 recovery,\u201d Mike Simonsen, founder and president of real-estate analytics firm Altos Research, told MarketWatch.\u00a0<\/p>\n \u201cThere appears to be more demand than available supply for homes, especially in the real-estate market,\u201d he explained, which is keeping home prices high, but that doesn\u2019t mean demand could evaporate if the current situation changes. Recall when rates doubled from pandemic-era lows in 2021 to 7% last year, which zapped home-buying momentum.<\/p>\n House hunters have adjusted their expectations. But if rates were to jump from 7% today to even higher levels, \u201cI would not be at all surprised if homebuyers stopped abruptly again,\u201d Simonsen said, stating his thesis for the fragility of the sector. Americans broadly expect rates to go over 8%, according to a March survey by the New York Federal Reserve.<\/p>\n MarketWatch looked at three housing-market indicators \u2014 and the picture looks rosier than ever:<\/p>\n Redfin\u2019s deputy chief economist, Taylor Marr, said his go-to indicator was active listings.\u00a0<\/p>\n Active listings are down this spring, compared to the previous year, according to the company\u2019s data. At the end of June, the number of homes listed for sale on the market was down 8.1% over the prior year.<\/p>\n \u201cIt really captures that supply is pulling back significantly relative to demand,\u201d Marr said.<\/p>\n About 14 million mortgages were refinanced during the COVID-19 pandemic. Few homeowners find it in their interest to sell their home and give up an ultra-low mortgage rate they secured during that time. Selling a home in July 2023, and purchasing a new one may entail taking a mortgage rate in the 7% range.<\/p>\n As a result, the housing market is seeing an excess of demand and not enough supply, which has led to a resurgence of bidding wars in some parts of the U.S.<\/p>\n While this metric is showing signs of the housing market returning to life and heating up amid a shortage of houses for sale, Marr said he\u2019s not yet ready to call it a recovery. \u201cIt\u2019s hard to declare completely the bottom of the housing market,\u201d he said.<\/p>\n Still battle-scarred by the housing crash of the Great Recession, Marr said economists \u201cmight be hesitant\u201d to say that the housing market is in recovery mode. \u201cWe still have a lot of uncertainty with the economy ahead,\u201d he added. \u201cIf the economy really takes a turn three or four months from now for whatever reason, it could certainly bring the housing market back lower than it was even last November,\u201d he added.<\/p>\n With a major shortage of resale homes, new-home sales have been taking off.\u00a0<\/p>\n Home builders, understandably, are thrilled about the inventory shortage.\u00a0<\/p>\n The National Association of Home Builders measures builders\u2019 sentiment in a monthly index, and that indicator has been very cheery of late. In June, the index turned positive for the first time in nearly a year. Builders were scaling back price reductions; they were happy about current sales conditions as well as sales over the next six months, the NAHB said.<\/p>\n \u201cA bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,\u201d said Rob Dietz, chief economist of the NAHB.<\/p>\n One of the major U.S. home builders, Lennar, also offered some commentary on its second-quarter earnings call last month. The company\u2019s executive chairman, Stuart Miller, said that \u201cthe market and the economy will remain constructive for home builders as pent-up demand continues to come to market and consume affordable offerings.\u201d<\/p>\n Miller also doesn\u2019t expect the supply issue to be fixed anytime soon: \u201cWe believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance,\u201d he said on the call. \u201cThe core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve.\u201d<\/p>\n Home-builder confidence, as a result, is signaling high optimism about the future of the housing market, and a return to normalcy.<\/p>\n As a result, housing starts have spiked as builders scramble to meet the demand.\u00a0<\/p>\n Ali Wolf, chief economist at Zonda, looks at how prices of new homes trend relative to resale homes as a key indicator of the health of the housing market. Her conclusion? Housing industry professionals involved in the construction and sale of new homes are out of a recession, given the robust demand.\u00a0<\/p>\n In fact, demand has been so strong that new homes \u2014 generally considered to be more expensive than resales \u2014 have become more affordable in home buyers\u2019 eyes given the competition in the existing home space.\u00a0<\/p>\n Typically, new homes are 20% more expensive than resales, Wolf said.\u00a0 And today? That spread has fallen to 4%.\u00a0<\/p>\n So what\u2019s going on? Builders are not necessarily slashing prices. Instead, existing home prices have risen as homeowners are reluctant to sell.<\/p>\n That\u2019s a good deal for buyers. New homes, Wolf said, are traditionally considered a \u201cluxury good.\u201d They\u2019re brand new, and buyers can often customize them. They also require less maintenance than older homes.<\/p>\n Simonsen, who leads Altos Research, said price cuts were his go-to indicator to gauge the health of the real-estate market. Specifically, price cuts formed a proxy for demand, he explained.<\/p>\n \u201cWhen the houses are on the market, if there are no buyers for the current houses that are listed, people start taking price cuts,\u201d Simonsen said.\u00a0<\/p>\n And to be clear, price cuts jumped last year, when rates jumped, he added.\u00a0<\/p>\n But that dynamic has since changed, as seen in the chart below. \u201cThere are currently fewer price reductions now than in 2018 or 2019,\u201d Simonsen said.<\/p>\n
\n \u2014 Torsten Slok, chief economist at Apollo<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\nActive listings are down \u2014 blame interest rates\u00a0<\/strong><\/h2>\n
The price gap between new and existing homes<\/strong><\/h2>\n
Sellers are holding out<\/strong> on cutting prices<\/h2>\n