-
The US housing market distorts a fundamental economic principle: supply and demand.
-
Home prices rose to record highs in May, while sales of existing homes fell and the supply of homes for sale increased.
-
“This one is a real headache,” said economist David Rosenberg.
The US housing market has officially entered the bizzaro world.
The law of supply and demand is a basic principle of any free market, and right now it is being undermined by strange events in the real estate market.
The supply of homes for sale is increasing, while demand for homes is falling, and yet home prices continue to reach record highs.
“When it comes to the housing market, the laws of supply and demand no longer appear to apply,” economist David Rosenberg said in a note this week.
Existing home sales fell to a four-month low of 4.11 million units in May, down 2.8% year-over-year. In contrast, the number of existing homes for sale rose 18.5% year-over-year in May.
“Unsold inventory backlogs rose from 2.9 months of supply in February to 3.2 months in March, to 3.5 months in April and 3.7 months in May, representing the highest level since June 2020,” Rosenberg said.
But despite falling demand, as measured by declines in existing home sales and rising supply, the average home price rose 5.8% year over year to a record $419,300 in May.
“This one is really a surprise: demand is at its lowest level in four months, supply is at its highest level in four years and prices are at unprecedented levels,” Rosenberg said.
Part of the disconnect is that real estate is a very regional, localized market, with some areas stronger than others. Texas and Florida, for example, have seen home prices fall while the supply of homes for sale has skyrocketed.
The other part of the equation has to do with mortgage rates, which are hovering around 7%, at levels that have been high for decades. That has locked out many potential home buyers and locked in potential sellers who don’t want to refinance their next home purchase at higher rates, essentially freezing the market.
But the dynamics of falling demand, rising supply and rising house prices cannot last forever.
“At some point something has to break – interest rates or prices,” Rosenberg said.
Some market experts believe that house prices will fall sharply.
Market strategist Chris Vermeulen highlighted a plateau in homebuilder activity as a reason to believe the housing market could experience major “downside pressure.”
“The reality is that I think we are going to see this collapse,” Vermeulen said.
However, others expect home prices to continue rising once the Federal Reserve cuts interest rates. According to the CME FedWatch Tool, markets expect the central bank to make the first cut at the September policy meeting.
Lower mortgage rates would reduce borrowing costs but also boost demand as more borrowers return to the mortgage market.
Well-known investor Barbara Corcoran has said that a drop in mortgage rates will push house prices up even further.
“As soon as the real interest rate drops even one point, everyone jumps into the market and you pay a lot more for your house,” Corcoran said.
Read the original article on Business Insider
