Commenting on the Renewed Plunge in Existing Home Sales, NAR economist Lawrence Yun Blames Mortgage Rates.
"The housing market is obviously very sensitive to mortgage rates. Softer sales in December reflected consumer search processes and contract signing activity in previous months when mortgage rates were higher than today. Now, with mortgage rates lower, some revival in home sales is expected going into spring."
Existing Home Sales 1970-Present
Existing home sales are about where they were in 1998 when mortgage rates were generally in the 6.5% to 7.5%. Today, 30-year fixed rates are under 4%.
Population-adjusted, these sales numbers are a disaster. Clearly mortgage rates are not the overriding factor.
Mortgage Rates Shifted 2-3 Months Forward vs Existing Home Sales
Existing home sales are recorded at signing. The purchase offer is typically 1-3 months prior.
Yun blames December weakness on "contract signing activity in previous months when mortgage rates were higher than today."
In the above chart I shifted mortgage rates forward approximately 2-3 months forward so the sales more accurately reflect the interest rates at signing.
There are some long-term trends that hold, but there is no magnitude or scale that directly ties the two together.
2013 vs 2016
A decent spike in mortgage rates in 2013 correlates with a decent drop in sales. A similar spike in 2016 did nothing.
Mortgage Rates a Small Factor
Mortgage rates are a factor, but clearly not the most important one. Affordability, jobs, sentiment towards buying a home count more than mortgage rates.
If that were not the case, existing home sales would not be at the 1998 sales level with allegedly millions more people wanting a home.
Wage growth has been anemic. Home prices have risen far more than wage growth. That's what matters the most.
Shrinking Pool of Eligible Buyers
Each person who buys a home who can afford one, takes one person out of the pool of eligible buyers.
As long as home prices rise more than wages, the pool of eligible buyers shrinks.
Eligibility is not the only constraint. Desire is another. Millenials do not have the same attitudes towards assets, homes, cars, etc., as their parents.
Many live with their parents, taking care of them. Many are trapped by student loans.
Many saw their parents or friends' parents lose their homes in the financial crisis and do not want to be in the same position.
Finally, it's pretty clear the global economy is slowing. The US will not be immune.
Perhaps there is a short-term bounce, but perhaps we just saw it. The housing headwinds are enormous.
Mike "Mish" Shedlock