The US real estate market has just entered a difficult phase
All right, Jay Powell, part of your plan seems to be working: fewer people are buying houses. But that’s not translating into lower prices, at least not yet.
Meanwhile, sales fell for the fifth straight month, down about 14% from a year ago.
Now, in simple economics (the only one I know of), when prices get too high, it should weaken demand – which in turn should drive prices down. But that takes time, especially when the market is as hot as it has been for the past two years.
Right now is a tricky time when neither buyers nor sellers are so happy.
There are several reasons for this:
- Mortgage rates are double what they were a year ago. The standard 30-year fixed-rate mortgage stood at 5.5% this week, down from 2.8% a year ago. Naturally, this makes potential buyers wait and hope for a better deal.
- Inventories improved slightly but remain historically tight. Homebuilders are slowing construction of new homes, understandably fearful of getting caught in a glut if a recession hits and craters demand.
- The sellers, meanwhile, may have become too greedy. Think about it: how many neighbors or acquaintances do you know who have sold their homes for twice as much, within days of listing? It’s the seller’s market everyone expects.
- Key quote: “Buyers can’t determine what the right price is,” Mark Zandi, chief economist at Moody’s Analytics, told The Wall Street Journal. “Sellers are very reluctant to give up” the price they hoped to sell a few months ago.
Sales are expected to continue to fall as buyer prices are depreciated by mortgage rates, which are influenced by the Federal Reserve’s key interest rate policies. And the Fed is all but certain to continue raising rates aggressively until this historically high inflation reverses. (Tune in next Wednesday to see what Jay Powell and his merry gang of nerds have in store for us this time…)
Despite this overall decline in sales, some markets continue to work. Miami, for example, saw the median home price rise 40% from a year ago. (Orlando and Nashville homes are up nearly 31%.)
“A combination of higher prices and higher mortgage rates has clearly changed the dynamics of the housing market,” said Lawrence Yun, chief economist at NAR. “Even people who want to buy are just overpriced.”
Even though home sales have slowed to the pace of 2019, the market remains extremely dynamic. The number of days a property is on the market before going into contract is the fastest on record, at 14 days. (A year ago it was 17 days, and a more typical market would see properties on the market for nearly 30 days.)
“Maybe the buyers are trying to take advantage of a lower lockup rate… They want to sign the contract and close the deal quickly,” Yun said.
But sellers should take note: This rapid period in the market is unlikely to last, Yun said.
NUMBER OF DAYS: 98%
Temperatures are scorching across Europe, but leaders are already preparing for what could be a long and painful winter.
Here’s the deal: The European Union unveiled its emergency gas rationing plan on Wednesday, urging its 27 member states to cut gas demand by 15% and pushing manufacturers to switch to alternative energy sources.
This is the moment of rationing that many Europeans feared would result from Russia’s invasion of Ukraine in February.
A key gas pipeline linking Russia to Germany has been closed for the past 10 days for routine maintenance. And there’s a good chance, according to European officials, that Russia’s state-owned gas company will simply refuse to resume deliveries tomorrow when maintenance is supposed to end.
“Russia is blackmailing us. Russia is using energy as a weapon,” said European Commission President Ursula von der Leyen.
Already, Russia has shown its willingness to militarize its energy supplies, cutting off some countries because they refuse to pay their bills in rubles (which would violate European sanctions). And last month, Russia cut flows through the pipeline by 60%, blaming Western sanctions.
President Vladimir Putin said this week that Russia would “fulfill all its obligations” by supplying gas to Europe. But, like, it’s Putin – no one really knows what to expect.
This uncertainty is a big part of the problem for the European economy.
- Fears of energy supply disruptions have driven benchmark gas prices up about 85% since the invasion of Ukraine, according to the Intercontinental Exchange.
- On Wednesday, prices rose 5% as the deadline for reopening the pipeline approached.
- Like the United States and other developed economies, Europe faces rampant inflation. And political upheavals. And climate change. And a noticeable change in the direction of the economic rebound.
- A European recession is not a given. But “a sharp slowdown in growth is 100% sure,” writes my colleague Julia Horowitz.
Energy officials say Europe must find ways to save 12 billion cubic meters of gas – around 3% of its annual consumption – over the next 12 weeks to avert disaster.
“It’s a big ask, but it doesn’t exaggerate the magnitude of what is needed,” Fatih Birol, executive director of the International Energy Agency, said earlier this week.
“It is absolutely not enough to rely solely on gas from non-Russian sources – these supplies are simply not available in the volumes required to replace the missing deliveries from Russia,” he added.