Category Archives: real estate

Relative Affordability of New Homes Worsens Slightly

House on Money by http://401kcalculator.org via Flickr - https://www.flickr.com/photos/68751915@N05/6848820425/in/dateposted/

The relative affordability of the median new home sold in the U.S. was little changed in May 2023.

That's not entirely true. It worsened slightly because of a combination of factors.

Mortgage rates ticked up by less than a tenth of a percent to average 6.43% during the month, which combined with an increase in the median price of new homes sold to make them a little more costly for a household earning the median income in the U.S.

The net effect of these changes was to increase the amount that a fully-financed mortgage payment for the median new home sold in the U.S. costs. In May 2023, the initial estimate of that figure rose to 40.5% of the median American household's monthly income.

This estimate is well above the threshold of 36% of household income that marks the traditional limit of affordability for owning a home, assuming the homeowners have no other debt. This figure is also well above all-but-the-peak of relative unaffordability that prevailed during the housing bubble years of the early 2000s.

The following chart shows how May 2023's relative affordability fits among the data for the 21st century to date:

Mortgage Payment for a Median New Home as a Percentage of Median Household Income, January 2000 - May 2023

We're not the only ones pointing out how relatively unaffordable new homes have become.

Americans looking for a new home are facing the least affordable market ever, according to data from the Mortgage Bankers Association.

The group's Purchase Applications Payment Index (PAPI) increased 0.5% in April to a record high of 172.3. A higher reading indicates declining borrower affordability conditions, due to either increasing loan amounts, rising mortgage rates, or a decrease in earnings.

"This hit a new record because not only have interest not retreated from the high 6s, but the typical application amount has jumped, all faster than incomes have grown," Edward Seiler, MBA's associate vice president for housing economics, told Insider.

These days, what passes for improvement in the relative affordability of new homes has all taken place as new homes have remained even more unaffordable than they were when the housing bubble peaked!

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 26 June 2023. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 26 June 2023. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 26 June 2023. Note: Starting from December 2022, the estimated monthly mortgage rate is taken as the average of weekly 30-year conventional mortgage rates recorded during the month.

Image credit: House on Money by http://401kcalculator.org via Flickr. Creative Commons. Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).

Scarcity of Existing Homes Boosting New Home Sales

Home Construction Workers by Thayran Melo via Unsplash - https://unsplash.com/photos/vK6HbLrGzZc

The rising trend for new home sales continued in May 2023. The initial estimate of the market capitalization of new homes sold during the month is $29.44 billion. That's a 2.6% increase over the revised estimate of $28.68 billion in April 2023, which itself was increased from an initial estimate of $27.94 billion.

Much of that increase was driven by a sharp increase in the number of new home sales. They rose to an annualized, seasonally-adjusted initial estimate of 763,000 during May 2023 from a revised estimate of 680,000 in April 2023. We'll focus on the reasons for that 12.2% increase later in this analysis.

The initial estimate of the median price of a new home sold in the U.S. during May 2023 is $438,200, while the first indication of the average sale price was $498,000. The average price is up by a small margin from April 2023's revised estimate of $479,900, which was revised downward from an initial estimate of $501,000. Looking at the trailing 12 month average, the average sale price declined to $522,900, continuing a downward trend since December 2022.

Here is the latest update to our chart illustrating the market capitalization of the U.S. new home market:

Trailing Twelve Month Average New Home Sales Market Capitalization in the United States, January 1976 - May 2023

The following two charts show the latest changes in the trends for new home sales and prices:

New home sales are on an uptrend:

Trailing Twelve Month Average of the Annualized Number of New Homes Sold in the U.S., January 1976 - May 2023

New home prices are trending downward:

Trailing Twelve Month Average of the Mean Sale Price of New Homes Sold in the U.S., January 1976 - May 2023

Reuters reports on the rising trend for new home sales:

Sales of new U.S. single-family homes surged to the highest level in nearly 1-1/2 years in May, benefiting from a dearth of previously owned homes available for sale.

New home sales jumped 12.2% to a seasonally adjusted annual rate of 763,000 units last month, the highest level since February 2022, the Commerce Department said on Tuesday....

The median new house price in May was $416,300, a 7.6% drop from a year ago. There were 428,000 new homes on the market at the end of last month, down from 432,000 in April. At May's sales pace it would take 6.7 months to clear the supply of houses on the market, down from 7.6 months in April.

Did you catch the part about the "dearth of previously owned homes available for sale"? Here's how TheRealDeal, which specializes in covering the real estate industry, reports what's happening in that portion of the U.S. real estate market:

As mortgage rates remain above early pandemic levels and housing inventory wanes, existing home sales are seeing a large drop.

Existing home sales fell 20.4 percent year-over-year in May, according to a report from the National Association of Realtors. The factors roiling the market also took a bite out of prices for existing homes, which notched its biggest annual decline in 11 years.

Despite the significant annual drop, sales from the previous month marked a small increase. On a seasonally adjusted basis, existing home sales rose by 0.2 percent from April to May.

Inventory is one of the biggest factors plaguing existing home sales. Total housing inventory was down 6.1 percent year-over-year last month. Unsold housing inventory ended May with a three-month supply available.

Because of the lack of supply of existing homes for sale in the current environment, home buyers are being forced into the market for new homes. The number of existing home sales has dropped to levels last seen during 2020's Coronavirus Pandemic or the deflation phase of the housing bubble from 2007 to 2011.

According to MarketWatch, that may be because potential home sellers are becoming "trapped" in their current homes thanks to the increase in mortgage rates.

There is evidence that having a low 30-year fixed mortgage rate is holding people back from moving. This feeling of being “stuck” has resulted in a very low number of new listings on the market.

New listings are down by 25% as compared to a year ago, Redfin said in a recent report, the biggest drop since May 2020 during the spread of the coronavirus.

Unsold housing inventory was at a 2.6-month supply, as of the latest count at the end of February, based on a report from the National Association of Realtors.

“Inventory levels are still at historic lows,” Lawrence Yun, chief economist at the NAR, said in that report....

Home buyers have in recent months been pushed into new builds, unable to find good options in the resale market.

The National Association of Home Builders said on Monday that historically, only about 10% of the housing inventory was new construction — now new builds make up one-third of the total inventory.

That's a viable explanation for why the new home market is rising despite the increase of mortgage interest rates. The plus side of this situation is that new home sales are providing a tailwind to the economy, because that's the part of real estate market that adds the most to the nation's GDP. The minus side is that a growing number of Americans are having to pass on being able to pursue new opportunities because they cannot afford to move out of their existing homes.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 27 June 2023. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 27 June 2023. 

Image credit: Photo by Thayran Melo on Unsplash.

Less Than Useful Data: FHFA House Price Index

FHFA House Price Index - Source: FHFA Insights Blog - https://www.fhfa.gov/Media/Blog/Pages/Video-Shows-How-the-FHFA-House-Price-Index-is-Calculated.aspx

Ever since the housing bubble inflated and deflated at the beginning of the 21st century, housing price data has been important.

As it should be. That data can be used to tell you quite a lot about the relative health of the U.S. homebuilding and real estate industries. It can also tell you quite a lot about how affordable homes are for a typical American household.

But not all housing price data is that useful. Some housing price data might even be considered to be less than useful.

When economist Mark Zandi was asked in 2010 about what he thought were the most overrated economic indicators, here's how he answered:

I cherish all economic indicators, although it is fair to say some indicators are more useful than others. It is also important to point out the indicators I value most vary according to where we are in the business cycle and what is driving the cycle. Having said this, the indicators that I generally pay less attention to include: FHFA house prices; weekly chain store sales; Challenger layoff announcements; and the producer price index. These indicators are either often misleading or the signal to noise ratio is very high and thus hard to interpret.

If the criteria of signal-to-noise ratio is the issue, with noise exceeding signal being a bad thing, it's not surprising the FHFA House Price Index would be the first official metric that might come to Zandi's mind when asked.

This quarterly index aims to measure the average changes in housing prices based on the sales or refinancing of single family homes whose mortgages were either purchased or securitized by Fannie Mae or Freddie Mac. The Federal Home Financing Agency's description of what it does to update its data series goes a long way toward explaining why its House Price Index (HPI) is particularly noisy:

Each month, Fannie Mae and Freddie Mac provide FHFA with information on their most recent mortgage transactions. These data are combined with the data from previous periods to establish price differentials on properties where more than one mortgage transaction has occurred. The data are merged, creating an updated historical database that is then used to estimate the HPI.

The FHFA continues to explain how and why it revises its data series each quarter:

Historical estimates of the FHFA HPI revise for three primary reasons:

(a) The FHFA HPI is based on repeat transactions. That is, the estimates of appreciation are based on repeated valuations of the same property over time. Therefore, each time a property "repeats" in the form of a sale or refinance, average appreciation since the prior sale/refinance period is influenced.

(b) Fannie Mae and Freddie Mac (the Enterprises) purchase seasoned loans, providing new information about prior quarters.

(c) Due to a 30- to 45-day lag from loan origination to Enterprise funding, FHFA receives data on new fundings for one additional month following the last month of the quarter. These fundings contain many loans originating in that most recent quarter, and especially the last month of the quarter. This will reduce with subsequent revisions, however data on loans purchased with a longer lag, including seasoned loans, will continue to generate revisions, especially for the most recent quarters.

The result is the FHFA's House Price Index can bounce around a lot before settling, months after its data would no longer provide anything like a near real-time picture of what's happening with housing prices.

Zandi highlighted another weakness that contributes to the FHFA's weakness as an economic data series in a 29 November 2022 tweet:

In a reply to that tweet, Zandi noted the FHFA doesn't adequately cover data from California, which means the HPI is missing changes happening in high-priced markets like California. Others responding to Zandi's tweet noted the FHFA data is also subject to larger residual seasonality, which adds to its fickleness.

From our perpsective, the FHFA's House Price Index became all but obsolete as a national index with the introduction of the S&P CoreLogic Case-Shiller U.S. National Home Price Index in 2006. But it seems the FHFA House Price Index may be occasionally useful in a way other than it is intended to be. We find it interesting that economists like Zandi are using its known limitations to extract information about the state of the housing market that might otherwise remain hidden.

That puts it into a class similar to the consumer confidence data that we likewise discovered might be occasionally useful. It just takes the information from a better house price index combined with an uncommon situation to make it so.

Previously on Political Calculations

Visualizing 52 Years of U.S. Mortgage Rates

Mortgage Payment Due date by alanharder.ca via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Mortgage_Payment_Due_date!_-_51245764089.jpg

In the United States, 30-year mortgage rates play a big role in determining how affordable housing is for American households.

As important as they are however, the historical data for mortgage rates is surprisingly lacking. Freddie Mac, officially known as Federal Home Loan Mortgage Corporation, only has weekly data extending back to April 1971. The government-sponsored enterprise used to report monthly averages for mortgage rates, but that discontinued that practice after December 2022.

And yet, because housing sales and prices are reported on a monthly basis, it's incredibly useful to have mortgage rates averaged over the period of a month. Since Freddie Mac isn't doing that job any more, we're taking it over. Not only that, we're making all that historic data freely available!

It's built into the following interactive chart, which visualizes 52 years worth of the average monthly interest rates for 30-year conventional mortgages in the U.S.

Monthly Average 30-Year Mortgage Rates, April 1971 - April 2023

Some quick observations:

  • In April 1971, the average 30-year mortgage rate was 7.31%.
  • The hyperinflation of the late 1970s contributed to the rapid rise of mortgage rates, which first peaked at 16.33% in April 1980, then fell back to 12.19% just three months later. Mortgage rates then proceeded to rise rapidly once more, reaching a record high peak of 18.45% in October 1981.
  • Over the next 40 years, the 30-year conventional mortgage rate generally fell in a long, sustained downtrend. The interest rate on a 30-year conventional mortgage ultimately bottomed at 2.77% in November 2020.
  • Mortgage rates then began rising slowly, reaching 3.10% in December 2021.
  • After December 2021, mortgage rates surged as the Biden-era's inflation firmly took hold. The average mortgage rate peaked at 6.90% in October 2022, before falling back. During 2023, the interest rate on a conventional 30-year mortgage has ranged between 6.27% and 6.54%. In April 2023, the average 30-year mortgage rate was 6.34%.

We plan to update the chart every few months. If you are looking to find a recent month's average rate that hasn't yet been included, see the references....

References

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 23 May 2023. Note: Starting from December 2022, the estimated monthly mortgage rate is taken as the average of weekly 30-year conventional mortgage rates recorded during the month.

Image credit: Mortgage Payment Due date by alanharder.ca via Wikimedia Commons. Creative Commons Attribution 2.0 Generic (CC BY 2.0).

Falling New Home Prices Boost Affordability in April 2023

Keys on hand by Maria Ziegler via Unsplash - https://unsplash.com/photos/jJnZg7vBfMs

The reduction in new home sale prices in April 2023 combined with a small reduction in mortgage rates to boost their affordability. That result however is relative, because home prices remain well elevated above what the typical American household income can afford.

After increasing to 6.5% in March 2023, the average interest rate on a 30-year conventional mortgage dipped back to 6.3% in April. New home prices also decreased, with the median sale price for a new home dropping an initial estimate of $420,800, which represents a decrease of $35,000 from March 2023's revised estimate and is $37,400 below the median price recorded a year earlier.

Factoring in our initial estimate for median household income in April 2023, we find the mortgage payment for a fully financed median new home sold during the month would consume 38.7% of that income. While that represents a decrease from the revised figure of 43% for March 2023, it still exceeds the 36% threshold that sets the bar to be considered "fully unaffordable" for a household earning the median income. In this case, it signals the cost of owning the typical new home sold in the U.S. during April 2023 is out of reach of the majority of American households.

The following chart shows the basic mortgage payment for the median new home sold in the U.S. as a percentage of median household income. The affordability data from October 2022 through March 2022 was revised upward because of the May 2023's income data revision.

Mortgage Payment for a Median New Home as a Percentage of Median Household Income, January 2000 - April 2023

Looking forward, mortgage rates ticked up to average 6.4% in May 2023, which will be a headwind to improving affordability. After the income data revisions, it appears median household incomes are still trending upward, which provides a tailwind. The wild card that will determine how the affordability of new homes is changing will be the sale prices of new homes, which won't be reported until the end of this month.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 23 May 2023. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 23 May 2023. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 23 May 2023. Note: Starting from December 2022, the estimated monthly mortgage rate is taken as the average of weekly 30-year conventional mortgage rates recorded during the month.

Image credit: Photo by Maria Ziegler on Unsplash.