Pollack: Housing: Where is it headed?

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co

Where is the Housing Market Headed?

There are lots of opinions on where the housing market is headed over the next couple of years. Prices across the country are up 42% over the past two years, even higher in Phoenix and other fast-growing cities across the Sunbelt. Mortgage rates are up to 5.5%, historically a very reasonable rate, but not compared to the rates quoted just six months ago. In response, the red-hot housing market has begun to cool dramatically in just the last month or so. The dreaded “R” word is still on everyone’s mind.

The most frequent way we enter a recession is the Fed raises rates to fight inflation. The leading indicator for this type of recession is the housing market. Housing is not particularly the target, but it ends up being the sacrificial lamb.

So where will the housing market end up? Bill McBride of Calculated Risk thinks U.S. home prices will be flat over the next year. Alternatively, Freddie Mac believes prices will rise another 4.4%. However, real estate is known as a market of markets. In other words, there is a big difference in price movements between homes in Evansville, Indiana and Greater Phoenix.

CoreLogic, a real estate data analytics firm, conducted an assessment of the likelihood of regional home price declines. Their analysis, based on various factors such as population and employment growth, unemployment rates, and the like, concludes that Maricopa and Pima counties have very low odds of home prices dropping over the next year. However, Yavapai and Mohave counties are found to have a very high probability of price declines along with Boise, Philadelphia, and San Francisco. For the next year, CoreLogic predicts U.S. home prices to rise 5%, but regional differences will vary from that forecast.

By comparison, Moody’s Analytics puts Phoenix, Boise, Austin, Las Vegas, Nashville, and several other Sunbelt cities in the “significantly overvalued” housing category which could mean price declines.

So, all we can do is watch the data as it comes in each month. The Snapshots below start to tell the story for the last month or so and the market in Greater Phoenix is clearly slowing. In the end, we are probably not heading towards a housing bust like we saw in the early part of the last decade. Homeowners are in better financial shape and financial institutions have been very careful in their lending practices. And even with a price drop of 10% or 20% in Greater Phoenix, if you are a homeowner, you have still gained equity. If you are not a homeowner, prices may be trending downward creating opportunities for purchase if you can withstand rising interest rates.

U.S. Snapshot:

  • The Conference Board’s Leading Economic Index dropped for the fourth consecutive months in June. The continuous decline suggests even slower growth and the probability of a recession is increasing.
  • Mortgage rates rose again to 5.54% last week, up from 5.51% last week and 5.30% from the beginning of the month. Concerns about inflation, recession fears and higher rates will cause price appreciation to slow.
  • Home builders’ confidence fell again in July and dropped to the lowest level since May 2020. Builders are dealing with shortages of supplies and labor, inflation and higher borrowing costs causing them to halt or slow construction.
  • The housing market has slowed as housing costs increases and consumer confidence drops, according to the U.S. Census Bureau. Total starts and permits were pulled down by the single family sector. Single family starts fell 8.1% to 982,000 seasonally adjusted annual rate (SAAR) in June. Permits had a similar drop of 8.0%. Multifamily was the lone bright spot, with starts and permits increasing by 15.6% and 26.0%, respectively.
  • Existing home sales fell again, but home prices increased in June. The National Association of Realtors latest release shows all sales dropping 5.4% and single family decline 4.8%. Median sale price increased 1.9% and existing home sales reached $416,000 and single family $423,300.

Arizona Snapshot:

  • Let’s look at Arizona’s seasonally adjusted June employment figures. The state added 15,000 more jobs. Greater Phoenix led the way by adding 16,300 jobs and Greater Tucson added 1,000 jobs. The balance of the state lost a combined 2,300 jobs in June.
  • Through the first six months of the year, Arizona has added 112,900 jobs. Leisure & Hospitality, Trade, Transportation, & Utilities and Educational & Health Services added 78,000 of those jobs. The state’s growth rate (3.9%) ranks 18th out of the 50 states. The Phoenix metro area added 85,700 jobs, while Tucson grew by 13,800. The major metros grew at 3.9% for Phoenix and 3.7% for Tucson.
  • Housing slows in both of Arizona’s major metros in June, according to RLBrownReports.com.
  • Greater Phoenix permit activity dropped 27.5% with resales falling by 22.5% and new home closings declining 1.7%. Year-to-date, permits (-10.3%), resales (-7.3%) and new homes (-4.0%) are all down compared to 2021. The median sales prices for existing and new homes have continued to slow as well. Resales saw no growth from May and remained 20.5% above last year’s level. New home prices increased 0.5% for the month and were up 23.4% for the year.
  • Despite new home sales outpacing last year’s June level, Greater Tucson was not immune to the uncertainty surrounding the economy. New home sales were up 9.7% from a year ago, but down 12.4% from last month. Permits were down 46% and resales were down 19.3% from last year. Median prices remained nearly at May’s level, with new home prices dropping 0.3% for the month and the price of existing homes increasing 0.9%.
  • Home builders, sellers, potential buyers and lending institutions will adjust their decisions as mortgage rates change as the Fed’s effort to tame inflation continues. Expect mixed headlines to continue as uncertainty surrounding the economy remains top of mind for consumers.
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