Whatever the future holds for the US economy, know that I won’t lie to you for clicks; it will be based on boring economic models that will be time tested and adapted 24/7 for new variables. You can glimpse my mindset in this podcast, which covers the entire COVID-19 crisis and housing. I think the title is appropriate: Bear Crusher.
As we can see below, housing moderated, found a footing and moved higher into the second half of 2021. I emphasize this because many people had sent me samples of YouTube videos of people announcing a housing crash in the second half. I can tell you that these people are not trained to read housing or economic data correctly. If they did, then the idea of a sales collapse in 2021 — when trend demand data always showed stability — is ludicrous. Remember, be the detective, not the troll.
Last week I wrote about how the existing home sales markets have outperformed my peak sales range in the past two sales reports. As long as the last two reports of the year are above 6.2 million, you should see that as a beat. Of course, total sales are above my critical level of 6.2 million when adding new home sales. So far, 2020 and 2021 have come in as a noticeable beat in my eyes. Mother Demographics and low mortgage rates are two very tough competitors to counter in advocating an epic housing crash.
From NAR: “Motivated by rapidly rising rents and the projected rise in mortgage rates, consumers with strong financial bases are signing home-buying contracts sooner rather than later,” said Lawrence Yun, NAR’s chief economist. “This solid purchase is evidence that demand is still relatively high as it is happening at a time when inventory is still remarkably low.”
Has anyone noticed that for the past eight years everyone has been blaming low inventory when we miss estimates, but keep quiet about it when sales are above estimates, while inventory is still falling? Over the years, I’ve never believed in the premise that low inventory holds back sales, which was expected when sales weaken. 2020 and 2021 will have a peak in pre-cycle demand, with total inventory levels at all-time lows for both years.
Remember that usually a seller is also a buyer, so inventory should drop when demand increases and that seller finds another home to buy. When the inventory rises and there is more supply in the market, it means that the demand decreases. Total inventory levels have fallen since 2014, while sales have increased. Keep this in mind in the future as sales will slow down at some point when mortgage demand declines.
From the NAR: “The remarkable gain in October sees total sales of existing homes to more than 6 million in 2021, which will be the best performance in 15 years.”
One aspect of housing that isn’t getting enough attention is that mortgage purchase application data has been on a nice run for 12 weeks. Earlier in the year, I wrote an article stating that the second half of 2021 data would be negative year after year, and we shouldn’t overreact to this, because the people with a home crash will.
It’s the nature of the beast as I’ve seen this behavior many times. The lack of training and failure to make COVID-19 adjustments to data creates a false sense of reality for those experiencing a housing crash, with some pushing for the negative year-over-year data as a legitimate starting point for the sales collapse .
As we can see, sales didn’t crash, but something else happened. The purchase request data got better as the year-over-year declines improved so much that we have a chance to report even a flat or positive print, which is going to blow my head. Even I didn’t think that would be possible with such high compositions as we can see below as mortgage demand is getting solid.
From July 14 to September 8, year-over-year purchase requisition data showed a trend of approximately negative 18%-19%. The higher compositions in 2020 would always result in negative year-over-year data this year. However, if we only look at the past eight weeks and still use high Comps, the average drop is about 8%-9%. The last three weeks together are only down 4.6% on average, and this data line looks out 30-90 days.
Yes, seasonality started a while ago, but solidifying this data line is a big deal. Consider this in the context of the focus on iBuyers, who may not even make up 1% of total home sales. The focus was also on investors, because the premise was that without investors the housing market would collapse. This idea lacks the real data trends that matter because the biggest home buyers in America are always mortgage buyers, not investors. We don’t have a Wall Street moat for housing: as mortgage demand declines, housing declines.
Hopefully my work this year can help you understand that sexy ideological headlines might get press time, but old-fashioned boring economic work gets the job done with satisfaction. Today’s pending home sales are just confirmation of what we’ve seen over the past two years: It’s the nerds’ revenge.