Has the housing market peaked?

Last week I attended a housing conference. The guest economist posited that inflation may have peaked. If inflation has peaked, what does that portend for home prices in Sarasota County?

In April, consumer prices rose 8.3% from a year ago, less than March’s 8.5%. Although a one (1) month, 0.2% reduction does not create a trend, it is a start. Nevertheless, inflation will be here for some time, and it will be a slow drip. But eventually, as the economy slows, and inflation eases, rates will come down, testing all-time lows. The question is by how much and when?

Demand for durable goods surged during the pandemic, while services dropped. Staying at and working from home accelerated the purchase of big-ticket items such as appliances, used cars, and homes. It strained the capacity of the economy to produce goods. Supply chains disrupted, resulted in shortages and higher prices. Inflation, which the Federal Reserve had pegged as “transitory” proved (as opined on these pages in July 2021) to be anything but transitory. Although the pandemic has subsided and normality has resumed, the demand for durable goods and supply chain disruptions remains high. The service industry (restaurants, cultural, entertainment, hospitality, travel), dormant far too long, has re-opened, taxed with a scarcity of employees, increasing wages, further fueling inflation.

The road to stable prices is apt to be slow in fits and starts, along with falling stock prices, higher rates, and weakened consumer confidence. However, there are positive indicators, particularly the strength of the dollar compared to foreign currencies. A strong dollar could create a ceiling for mortgage rates from going much higher. Jon Hilsenrath reported in the Wall Street Journal (WSJ) today, that the WSJ’s dollar index has risen 8% this year. Notwithstanding 40-year high inflation, the US remains the best place to park your money. The result is a continuing worldwide flight to the dollar. A strong currency makes imports less costly, which should help to hold down what would otherwise be even higher inflation, and it may indirectly temper mortgage rates from going much higher. A signal to the Federal Reserve that measured, rather than dramatic rate increases, may prove to be the remedy to restrain demand and cap rising consumer prices.

Inflation has finally driven the yield on the 10-year Treasury to its 4-year high of 2018. In early January, the yield was 1.75%. Last week the yield broke 3%, although it settled down today to 2.877%. Mortgage rates, most directly impacted by the 10-year yield, followed up with priced in rate hikes. Today, the 30- year mortgage is up over 2.5% since the end of the year, currently, in the 5.5% range.

More than 50% of all homes in Sarasota County have a mortgage. Consequently, when mortgage rates go up, days on the market grow, price appreciation and multiple bids slow down. It is the reason I have been arguing on these pages for a year that we need mortgage rates to reach 2018/2019 levels, when 5% mortgages slowed what was then escalating prices. The good news, we’re there.

Only higher mortgage rates will bring a degree of balance to home price growth and cool the over-heated housing market. It will not be immediate. It needs to get embedded. But over the next few months it will evolve. Home prices will continue to rise, but not at the current, torrid, and unhealthy 25% annual rate.

In Sarasota County, April brought the first indication of buyer’s beginning to push back. The median single- family resale was $485,000, down 1.4% from the prior month. Noticeably, in April months of inventory based on closed sales jumped 30% from the prior month to 0.9-month supply. The highest supply of homes in 15 months. It is the first sign that an adjustment may be taking shape in the marketplace.

I see it in my own practice. Although showings, days on the market (only 18 days last month), and offers remain strong, the intensity is wavering. Are we in an early stage of an adjustment in prices towards a marginally more balanced market? The next few months should be telling. Stay tuned.