Whispers of an impending housing market crash are circulating following the release of a surprisingly cold home sales report today. Indeed, the party may be over for housing as high mortgage rates force many would-be buyers to hold off their purchases.
What do you need to know about today’s key real estate data release?
Well, new home sales for October released today and the results were underwhelming. Sales of newly constructed homes dropped 5.6% in October to an annual rate of 679,000, well below September’s revised rate of 719,000. This is under analyst projections of an annualized sales rate of 723,000.
New homes have been something of a safe haven for buyers this year as sales of existing homes have been on the way down since February. In fact, existing home sales are on track to have their worst year in decades, while new home sales are up more than 17% from last year.
Reasonably so, mortgage rates have been trending past 7% since August — climbing as high as 7.79% near the end of October — forcing many buyers to reconsider their home ownership plans. Additionally, with so many homeowners enjoying rock bottom, pandemic-era mortgage rates, many are reluctant to sell, leaving housing affordability at a historic low. As Kelly Mangold of RCLCO Real Estate Consulting told CNN:
“The constrained resale home market has continued to benefit the new home market because new homes are often the only option readily available as many owners continue to remain in place with their favorable interest rates.”
Will There Be a Housing Market Crash?
This year’s housing market has been troubling. While real estate demand has been mostly falling this year, home prices are actually up slightly from last year, a function of the mismatched inventory of homes. This has mostly silenced any concerns of an impending real estate crash.
Going forward, the Federal Reserve may well rule the day. Indeed, if you recall, the October Consumer Price Index (CPI) report showed 0% month-over-month inflation and just a 3.2% annual rate. Some believe this may signal the central bank to reverse course and begin cutting rates.
While Fed officials will mostly insist it’s too early to begin cutting rates, concerns of a Fed-induced recession, combined with the nearly achieved goal of 2% inflation, may push the central bank to take measures like prematurely lowering rates as a means to avoid an economic slowdown. When the Fed changes the benchmark rate, mortgage rates tend to follow suit.
Interestingly, 10-year yields — which mortgage rates closely track — have been easing in the face of better-than-expected inflation reports. This has already put downward pressure on mortgage rates. Per Oxford Economics analysts:
“With mortgage rates coming off their multidecade high, new home sales may perk up in November. A frozen existing home market, along with homebuilder incentives, will also lend some support to the market for newly built homes.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
