The home buying frenzy, I predicted in January seems to have materialized as existing home sales for the month of February came in well above expectations. This may be a definitive sign that home buyers are coming to the realization that mortgage rates are entering a new range and that they can’t put off making their moves any longer.
It looks as if the late 2023 drop in mortgage rates fueled a big bump in existing home sales in February. Prices rose, yet inventory increased; suggesting both sellers and buyers are more willing to make a move. Sales increased in the South, Midwest, and West Coast while holding steady in the Northeast, according to data from the National Realtor Association.
Investors and first time home buyers made up over 50% of the total sales. The 26% attributed to first time buyers matches the record low for the category. Despite recent data, which suggests foreclosures are rising, distressed sales, including foreclosures, remained flat at 3% of the total. The fastest annual rate projection for future sales remains in the South, but remain down 2.9% from a year earlier.
Interest Rates Remain the Key to Home Sales and Spur Market Timing
In the past real estate was all about location. In the present it’s all about interest rates first, and location a not too distant second. In the current market, there are three requirements to sell a home: a good price, a good mortgage rate, and a location where the potential homeowner feels safe.
Of course, as I’ve noted here many times, the key mortgage rate seems to be 7%, which means that any time rates approach that level, potential home buyers may pull back their horns until they ease again. This type of market timing will likely persist for some time and is likely to create volatility in the monthly figures.
Bond Yields Remain Stable
Despite its recent climb, the U.S. Ten Year Note yield (TNX), the basis for most 30-year mortgages remains below the critical 4.4% range. TNX is once again testing the 4.2% area and the 200-day moving average as I write.
A move below this yield area could once again bring buyers off the sidelines.
Mortgages closed the week below 7%, which means that if bond yields don’t rise, the housing market could experience some more market timing.
Homebuilders Break Out
The homebuilder stocks, as in the S&P SPDR Homebuilder ETF (XHB) broke out of their recent trading range, spurred by both the Fed’s less hawkish talk and the increase in existing home sales as investors hop the improvement in the market spreads toward new homes as well.
A consolidation in XHB is likely as the ETF has come a long way in a short period of time. Still, the supply of homes for sales seems to have bottomed out. But, as I’ve been saying for months, the supply and demand scenario favors homebuilders.
Rental Market Faces Supply and Pricing Pressures
The rental market is also worth watching as the dynamics in this area of the housing market are evolving in a different manner. Specifically, new supplies are rising rapidly as new supply of apartments and single family rentals is increasing. It is likely that we will see either a flattening out of rents or even a decline over the next few months.
I am watching a group of single family home rentals in my neighborhood which are having a hard time finding tenants. The asking price is between $2500-$3000 per month on top of a month’s rent deposit. Granted, these homes are in the 1500-2000 square foot range. Yet, the asking prices are high.
Thus, to rent these homes, which are both in good shape, the renter has to come up with $5000-$6000 at the time of signing the contract. Both have been on the market for over a month now.
Apartment rents are not much better. A few miles down the road, some very attractive high end apartments which feature the usual gaggle of amenities, rent for $1500 for a one bedroom 700 square foot studio. A roughly 1900 square foot three bedroom unit in the same complex, goes for $3590-$4325 per month.
The iShares Residential Real Estate Capped ETF (REZ) is stuck in a trading range, which means investors are well aware of the price constraints in the rental market.
How’s inflation in your neck of the woods? I’d like to know. If you have thirty seconds check out my new poll on the subject here.
Consumers Continue to Struggle
The wildcard in what happens next in housing and the economy is the consumer. As I recently noted, corporate CEOs are openly discussing the spending cutbacks from consumers who earn below $75,000 per year. In this space, I’ve noted comments from Lennar’s CEO and others who’ve voiced their concerns. I’ve also described the huge miss in earnings, the upcoming closing of 600 stores by the company, and the subsequent crash in shares of Dollar Tree (DLTR), as another cautionary sign.
Now add similar comments from restaurant group Darden (DRI) to the list. Specifically, Darden’s CFO noted the company is noticing problems in both California and Texas.
Bottom Line – Market Timing and Reality
Home buyers are adapting to higher mortgage rates, but are also engaging in market timing based on the ups and downs of mortgage rates.
For now, homebuilders have the advantage as still tight supplies and high rental prices are keeping them competitive.
Rental property supply is likely to rise as construction has picked up over the last year.
At some point, rents will likely fall as supply increases.
The wild card is whether the consumer holds up. And that depends on inflation.
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