Weekly Economic Update - Bubble in Trouble?

In late 2017, Sean Becketti, Freddie Mac’s chief economist, wrote a long essay on price bubbles, asserting that a bubble isn’t a bubble unless it bursts. At that point there was a lot of concern that housing was heading for one. Today we appear to be in the midst of a slow leak.

There is more to support that this week. The quarterly report from the National Association of Realtors (NAR) on existing home sales and metropolitan statistical area markets (MSAs) not only confirms more home price deceleration but that inventories are growing.

The median price of a house sold in the fourth quarter of 2018 ($257,600) was 4.0% lower than a year earlier. Prices did increase annually in 163 of the 178 MSAs tracked, the same number as in the fourth quarter of 2017, but local markets posting double digit gains dropped from 26 a year ago to 18 in the third quarter of 2018, and to 14 in the fourth.

The national inventory rose 6.2% year-over-year to 1.55 million existing homes for sale, and from an estimated 3.5-month supply to 4.0 months. This is still well below the six months that indicates a balanced market, but heading in the right direction, especially given the time of year. Sales of existing homes were down 1.8% from the third quarter and 7.4% on an annual basis.

Things have been softening fastest in the West where sales slowed by 6.5% and 13.9% compared to the two earlier periods. Median home prices rose a scant 1.8%.

Lawrence Yun, NAR chief economist, says in light of the various hurdles for 2018, the fourth quarter was promising. “Home prices continued to rise in the vast majority of markets but with inventory steadily increasing, home prices are, on average, rising at a slower and healthier pace,” he said.

Afffordability Improving

Yun isn’t the only one who sees healthier price trends ahead. Forecasts from many major housing stakeholders have even begun to whisper about the possibility of growing affordability. 

Black Knight put a number on the trend.  In its recent Mortgage Monitor it said that while the monthly principal and interest payment on the average home is more than 10% higher than in January 2018, it has declined by $56 since November. Assuming a 30-year mortgage at 4.45%, that payment is now $1,192.

Consumers are speculating too. There was a declining share of respondents to Fannie Mae’s January’s National Housing Survey who expect housing prices to increase and a growing number looking for lower interest rates. Fannie Mae economist Doug Duncan said the survey’s results are in line with his forecast that affordability conditions would improve, and home sales stabilize in 2019.

02.15.2019

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