What’s Up with Real Estate?

Weekend Talking Points – ‘Dancin on the Ceiling’

by Scott BrixenMay 26, 2023

for Friday, May 26, 2023

Talking to clients this weekend? Of course you are! Here’s our weekly briefing on all things real estate. Remember: better-informed agents and LOs provide more valuable counsel to their clients.

Two Versions of Talking Points

This is the full version of Talking Points. It was written for YOU and includes all the relevant real estate news and views, plus deeper analysis of topics that matter, and often a bit of inspiration as well! The goal is to prepare you for a busy weekend of client contact.

In addition, paired agents and loan officers on ListReports have access to the Shareable consumer handout version of Talking Points. It was written for YOUR CLIENTS, and is much shorter (a one-pager). It can be personalized with your own comments and localized with the housing market statistics for your areas. It could be a client newsletter, an open-house handout or the basis for an impressive post-meeting email.

This week’s handout looks like this (but with your face and greeting!)

Want to learn more about it first? Read this detailed blog post.
https://medium.com/p/ef0480228574

Real Estate News in Brief

Happy Memorial Day Weekend! It’s been a tough week for real estate with 30-yr mortgage rates rising back above 7%. And it’s not because inflation is rising. It’s because the ‘debt ceiling’ deadline is looming and Congress doesn’t seem to recognize the massive consequences of a default.

April new home sales rose 4% MoM (and 12% YoY) to an annualized rate of 683,000. That’s the strongest pace of sales since March 2022. The number of new homes available for sale (inventory) was flat at 433,000. The median price of new homes sold fell 8% MoM, but this was more to do with mix (fewer homes priced >$500k) than actual price decreases.

April pending home sales were flat MoM but down 20% YoY. Most regions saw an increase in new signed contracts (West +4.7% MoM, Midwest +3.6% MoM, South +0.1% MoM), but a large (and strange) drop in the Northeast (-11.3% MoM) left us flat overall. The April pending sales figure suggests that May existing home sales will be in the range of 4.2–4.3 million [NAR]

Fitch Ratings, one of the Big 3 credit rating agencies, has put the US government on “rating watch negative” — which means there’s a big risk of a downgrade if a ‘debt ceiling’ deal isn’t struck soon. Why does this matter? Whether you are an individual, a company, or a country, a lower credit rating means that you’ll have to pay investors higher interest rates to compensate for your increased risk.

The second reading of 1Q 2023 GDP (advanced, preliminary, final) was revised up from 1.1% in the advanced reading to 1.3%. In either case, the slowdown continues. The 4Q 2022 final figure was 2.6% and 3Q 2022 was 3.2%.

The Conference Board’s index of Leading Economic Indicators fell 0.6% MoM in April. That’s the 13th straight month of contraction. The LEI has been a phenomenal recession predictor in the past, and based on their numbers, a recession is imminent.

Zillow lifted its 2023 home price forecasts to +3.9% YoY. Transaction volumes are expected to contract 13% YoY to 4.36 million.

Selling More Affordable New Homes

Last week, we wrote how builders were “on the verge of bullishness.” The limited supply of existing homes for sale means that new homes today represent one-third of the total (new + existing) homes available for sale. (Usually that figure is around 10%!)

But this is more than just a ‘substitution effect’. Builders are also benefiting from much lower materials costs (lumber is down 70% from its peak). And they’re adjusting their product mix to include more affordable homes (<$500k). They’re also reducing incentives, because they aren’t as necessary as they were a few months ago.

A year ago (April 2022), 42% of the new homes sold were priced over $500k. In April 2023, that figure declined to 30%. That’s a big drop! Similarly, a year ago, 33% of the new homes sold were priced between $200–399k. In April 2023, that figure rose to 47%.

Source: Census Burea

Fewer expensive homes, and more lower-priced homes. Think about what that means for the median prices of new homes sold! In April 2022, the median price was $458k. In April 2023, the median price was $421k. So have new home prices fallen 8%? No, they haven’t. There is some discounting, to be sure. But what’s really happening is that builders are reestablishing product-market fit in an high-inflation/high-mortgage-rate environment.

Just a Case of Recession Obsession

Will we go into a recession this year? Or are we already in one? Will it be mild or deep? Many forecasters expect at least a few quarters of contraction. A few examples below:

The wide range of forecasts indicates how strange the economic situation is: manufacturing and housing has been in a recession, but services are improving; the yield curve has been inverted for a record length of time, but unemployment is at a 50+ year low; much higher mortgage rates are slamming affordability, but home prices appear to have bottomed after a modest decline.

NOTE: A recession means lower inflation and increased job losses. The Fed always cuts rates aggressively in response to a recession. A lower Fed funds rate will lead to lower mortgage bond yields and lower mortgage rates for you and me. Importantly, lower mortgage rates should also “unlock” would-be sellers who feel “locked-in” by their current, very low mortgage rates.

What Exactly is a Recession Again?

Here’s the classic definition of a recession: two consecutive quarters of economic contraction. But what does an economic contraction actually mean? To answer that, let’s look at the classic formula for GDP:

GDP (Gross Domestic Product) = C + I + G + X

Where:
C = Private Consumption (Purchase of durable/non-durable goods + services)

I = Business & Private Investment (Capital expenditures + change in inventory)

G = Government Spending

X = Net Exports (Exports minus Imports)

In an economic contraction, GDP goes down. That doesn’t mean that every category (C+I+G+X) goes down; it just means that the combination goes down. In fact, the US only needs one category to contract for us to go into a recession. Can you guess which one?

We’re big spenders! The US generates ~70% of its GDP from Private Consumption. (For comparison, Germany and France are around 50%). If the average American pulls back on spending, it’s very difficult for the other categories to make up the difference.

NOTE: Business & Private Investment is around 18% of GDP and Government Spending is 17%. We import much more than we export (known as a ‘trade deficit’), so net exports actually subtract (-5%) from our GDP.

Recession Watch: May 2023

No single datapoint or single forecaster is a perfect predictor of recessions. (But a few do come very close!) Below, we’ve listed a number of key datapoints that together form a ‘mosaic’ of the current economic situation. To summarize, there are many more indicators flashing ‘negative’ than ‘positive’.

Commodity Prices Drive Goods Inflation
When commodity prices fall, that’s usually a sign of excess supply, fading demand, or both. Most commodity prices had huge moves up during the pandemic and/or the Ukraine invasion.

But they have been trending aggressively downward over the past year. Here’s how much the prices of a broad selection of commodities have declined from their peaks, and where they are relative to their pre-pandemic levels. This is what good inflation looks like.

Mortgage Market

Average 30-year mortgage rates are back above 7%. Sigh. [Mortgage News Daily]

It’s not because inflation isn’t coming down (it most certainly is). It isn’t because the Fed is going to keep raising interest rates (they’re likely done).

The latest move (from 6.5% → 7.0%) mostly reflects the approaching ‘debt ceiling’ deadline and the expectation of increased supply in the fixed-income (corporate and government bonds etc.) market. More bond supply → lower bond prices → higher bond yields.

The timing couldn’t be worse. New listings and transaction volumes should be climbing quickly right now. May is typically the biggest month for new listings. Instead, new listings for January-April are running 17% below 2022 and 27% below the 2017–2019 average. Existing home sales fell MoM in both March and April. And the pending home sales for April suggests we won’t see much improvement in existing home sales for May either.

The next Fed meeting is on June 13–14. Based on the Fed funds rate futures, the market is currently pricing in a 52% chance of NO hike and a 48% chance of another 25 bps hike. Just a few weeks ago, the probability of NO hike was around 80%.

They Said It

“The LEI for the US declined for the thirteenth consecutive month in April, signaling a worsening economic outlook. Weaknesses among underlying components were widespread — but less so than in March’s reading, which resulted in a smaller decline.

Only stock prices and manufacturers’ new orders for both capital and consumer goods improved in April. Importantly, the LEI continues to warn of an economic downturn this year. The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.” — Justyna Zabinska-La Monica, Senior Manager, The Conference Board.

Meaning: When you see the blue line below the red line, a recession pretty much always happens.

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