U.S. Home Sales Fell for Ninth Straight Month in October | Kanebridge News
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U.S. Home Sales Fell for Ninth Straight Month in October

Higher mortgage rates driven by aggressive Federal Reserve interest-rate increases are pushing buyers out of the market

By NICOLE FRIEDMAN
Tue, Nov 22, 2022 8:27amGrey Clock 4 min

U.S. existing-home sales fell for a ninth straight month in October, the longest streak of declines on record, as the steepest mortgage rates in two decades and high home prices are keeping many buyers on the sidelines.

Sales of previously owned homes declined 5.9% in October from the prior month to a seasonally adjusted annual rate of 4.43 million, the weakest rate since May 2020, the National Association of Realtors said Friday. October sales fell 28.4% from a year earlier, the biggest annual decline since February 2008.

Home sales have been declining each month since February, the longest stretch since NAR began tracking this data in 1999. From their recent peak in January, existing-home sales have dropped about 32%.

The slowdown is due to a rapid increase in borrowing rates. The average rate on a 30-year fixed-rate mortgage began to climb rapidly in the first quarter and rose above 7% earlier this month. Mortgage rates eased this week but are still more than double where they stood a year ago.

That surge in borrowing costs has driven away potential home buyers and led many would-be sellers to stay put, keeping inventory for sale tight. First-time buyers who have stepped back from the market are now facing rising rents and high inflation that can make it more difficult to save for down payments.

This year’s drop in home sales marks one of the biggest impacts from the Federal Reserve’s aggressive interest-rate increases aimed at cooling the economy and bringing down high inflation. Home sales are highly interest-rate sensitive and fuel related economic activity such as spending on renovations, furniture and appliances.

The housing-market slowdown is expected to persist in 2023 because home-buying affordability is near its lowest level in decades. Home prices have continued to rise on an annual basis due to low supply, though the pace of home-price growth has slowed sharply.

October’s 6.6% median price increase from a year ago is the lowest since June 2020.

Some economists expect significant price declines next year. “We have a demand side that has evaporated so rapidly,” said Diane Swonk, chief economist at KPMG, who is forecasting home prices nationally to fall 20% by the end of 2023 compared with this year.

Anne and Charles Rudig decided last year to move from Connecticut to Florida for a lower cost of living, including lower taxes. They bought a house in Melrose, Fla., in December 2021, but didn’t move immediately because the house needed repairs.

They watched mortgage rates rise and worried they would miss out on selling their Connecticut home during the hot market. “We really felt like we were running a race,” Mrs. Rudig said.

After the Rudigs listed their house in September, it sat on the market for more than a month, but they ultimately sold it in October for $302,000, about 4.2% above the list price. “The relief is enormous,” Mrs. Rudig said.

This week saw a pickup in home-buying interest as some buyers rushed to take advantage of the sudden drop in borrowing rates, which Freddie Mac said fell to 6.61%. Mortgage applications for home purchases rose 4% on a seasonally adjusted basis in the week ended Nov. 11 from the prior week, according to the Mortgage Bankers Association.

But home purchases are unlikely to become affordable for many first-time buyers unless rates drop below 6%, Ms. Swonk said.

“I’m not overwhelmingly confident that we’re going to see a rapid turnaround in this market anytime soon,” she said.

The Fed is expected to continue raising rates. Inflation stayed high in October, the labor market remained tight and consumers continued to spend robustly at retailers—all signs the economy is still running too hot for the Fed’s comfort.

“The rising mortgage rate is consistent with falling home sales,” said Lawrence Yun, NAR’s chief economist.

Excluding the early months of the Covid-19 pandemic, October’s existing-home sales rate was the lowest since December 2011, Mr. Yun said.

Broader economic uncertainty has also made buyers more nervous about making home purchases, real-estate agents say.

Homes typically go under contract a month or two before the contract closes, so the October data largely reflect purchase decisions made in September and August.

Demand also typically slows in the winter compared with the spring and summer.

Nationally, there were 1.22 million homes for sale or under contract at the end of October, down 0.8% from both September 2022 and October 2021, NAR said.

“The people that are selling right now are people that, for whatever reason, have to sell,” said Jennifer Barnes, a real-estate broker in Chicago.

Existing-home sales fell the most month-over-month in the West, down 9.1%, and in the Northeast, down 6.6%.

Erika Delk and Daniel Duke started house hunting in Santa Barbara, Calif., in 2021, and struggled to compete against cash buyers.

“We probably saw about 100 homes in person,” said Ms. Delk, who is 30. “Homes were just going for ridiculous prices.”

The couple lowered their budget as mortgage rates started rising, but they benefited from less competition in the market, she said. They bought a four-bedroom home in October at its listing price and negotiated a credit from the seller to pay for some repairs.

“There was a lot of, ‘Should we be doing this? Would it be better to wait and see if rates come back down?’” Ms. Delk said. But “we want to be here for a while, and the market really only matters when you buy your home and when you sell your home.”

Home builders have pulled back from new construction and started cutting prices in response to lower demand.

“Finding buyers who are both motivated and qualified is the new game in town,” said Eric Lipar, chief executive of builder LGI Homes Inc., in an earnings call this month.

A measure of U.S. home-builder confidence fell for the 11th straight month in November to the lowest level since April 2020, the National Association of Home Builders said this week.

Housing starts, a measure of U.S. home-building, fell 4.2% in October from September, the Commerce Department said this week. Residential permits, which can be a bellwether for future home construction, fell 2.4%.

News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from NAR.

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Investor buying of homes tumbled 30% in the third quarter, a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too.

Companies bought around 66,000 homes in the 40 markets tracked by real-estate brokerage Redfin during the third quarter, compared with 94,000 homes during the same quarter a year ago. The percentage decline in investor purchases was the largest in a quarter since the subprime crisis, save for the second quarter of 2020 when the pandemic shut down most home buying.

The investor pullback represents a turnaround from months ago when their purchases were still rising fast. These firms bought homes in record numbers last year and earlier this year, helping to supercharge the housing market.

Now, investors are reducing their buying activity in line with the decline in overall home sales, which have slumped with mortgage rates rising fast. But with investors’ large cash positions, and with big firms such as JPMorgan Chase & Co. planning to increase its exposure to the home-buying business, investors are poised to resume more aggressive buying when rates or home prices begin to ease.

These firms have seized on a pandemic-driven rise in demand for houses in suburban areas. These owners rented out the homes and increased rents on homes by double-digit percentages. By the first quarter of 2022, investors accounted for one in every five home purchases nationally.

But ballooning borrowing costs have kept investors from buying as much recently, said John Pawlowski, an analyst at Green Street. Buyers and sellers are also agreeing less often on pricing, stifling sales.

“It leads to a lot of people just putting down the pen,” Mr. Pawlowski said.

Rent growth has also begun to slow. Rents for single-family homes rose 10.1% year over year in September, down from 13.9% in April, according to housing data firm CoreLogic.

That rate of growth is still very high by historical standards, however, and much stronger than in the apartment market. Multifamily rent increases are now much lower by most measures. Near record-high rental prices are failing to attract as many new tenants, and demand in the third quarter fell to its lowest level in 13 years.

Demand for rental houses has held up better, in part because many of these homes are leased to relatively high-earning people who have found the for-sale market too expensive to buy, some analysts say.

That rent growth for single-family owners hasn’t translated into stock-market gains this year. Investors have lumped these owners in with home builders and sold many of them. Shares for the three largest publicly traded owners, Invitation Homes, American Homes 4 Rent and Tricon Residential, are each down more than 25% year to date, underperforming the S&P 500 over that period.

Rental landlords also face headwinds from rising property tax assessments that have come alongside enormous increases in home-price appreciation.

At the same time, large rental landlords are coming under greater scrutiny from federal and local governments. Congressional Democrats have hosted a series of hearings focused on eviction practices and rent increases. Three Congress members from California this month introduced a bill called the “Stop Wall Street Landlords Act,” which proposes levying new taxes on single-family landlords. It would prevent government-sponsored enterprises like Freddie Mac from acquiring and securitising their debt.

Many of the places where investors have eased purchasing are the same cities where they had counted for an outsize share of total sales. That includes Las Vegas and Phoenix, where investor sales dropped more than 44% in the third quarter compared with a year ago.

Fewer purchases by online house-flippers, or iBuyers, may have contributed to those declines, according to Redfin. Redfin decided to close its own home-flipping business, RedfinNow, earlier this month.

Nationally, investors still accounted for 17.5% of all home sales in the third quarter, a higher share than they held at any time before the pandemic, by Redfin’s count.

That share seems likely to rise again. Builders with unsold homes due to widespread cancellations by traditional buyers have been looking to sell in bulk to rental landlords.

Meanwhile, some institutional investors are now readying large funds to snap up homes. J.P. Morgan’s asset-management business said this month it had formed a joint venture with rental landlord Haven Realty Capital to purchase and develop $1 billion in houses. A unit of real-estate firm JLL’s LaSalle Investment Management, in partnership with the landlord Amherst Group, said it plans to buy $500 million of homes over the next two years.

Tricon has nearly $3 billion it plans to tap to buy and build homes. “We will lean in and deploy that capital when the time is right,” Tricon’s Chief Executive Gary Berman said on a November earnings call.

While a recession could bring down borrowing rates, it would likely be accompanied by higher unemployment, making it difficult for traditional buyers to take advantage, said Daryl Fairweather, Redfin’s chief economist. For investors, however, that could offer an opportunity to acquire homes at favourable prices.

“An investor may have more resources to jump in at exactly the moment when rates decline,” Ms. Fairweather said.

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