Anyone who has been paying attention to U.S. home sales would probably have seen signs of homes sold all cash and above the asking price. At least I have seen some in my neighborhood in Long Island, New York.
Home sale signs of this sort are consistent with data from Redfin last spring showing that half of the U.S. homes are sold above the listed price. That’s a record since the company began compiling data on home sales, highlighting the fever pitch surrounding the housing market.
According to a report released by the National Association of Realtors on Monday, existing-home sales rose at a monthly rate of 0.80% to 6.34 million in October. That’s the highest home sales have been since January, beating market expectations of 6.2 million, thanks to solid gains in the Midwest and the South.
“Home sales remain resilient, despite low inventory and increasing affordability challenges,” said Lawrence Yun, NAR’s chief economist. “Inflationary pressures, such as fast-rising rents and increasing consumer prices, may have some prospective buyers seeking the protection of a fixed, consistent mortgage payment.”
Meanwhile, new home sales jumped 14% in September to 800,000 units, up from 702,000 units in August, thanks to solid gains in the South and the Northeast. That’s the highest they have been in the last six months.
Strong home sales have helped drive home prices at record levels. The S&P-Case-Shiller U.S. National Home Price Index has risen from $136,600 in 2012 to $217,000 in 2020 and $267,000 in 2021. The median new home sales price stood at $408,800 last September, up from $344,400 a year earlier.
What’s fueling the fever pitch for home-buying? Several factors.
Top on the list is low mortgage rates, which keep the mortgage serving payments low and affordable to a broad class of buyers. According to the Mortgage Bankers Association of America, fixed 30-year mortgage rates in the United States have been hovering around 3.20% in the last twelve months.
Then there are the high levels of home affordability among households, thanks to generous government benefits, which helped household incomes rise during the pandemic recession, something the Fed official calls an “anomaly.” According to Statista, the composite affordability index–the ratio of median family income to qualifying income—is standing at 151.8, well above the historical average of 128. Figures over 100 mean that the typical (median) family has more than sufficient income to buy the median-priced home.
And there are robust equity prices, which add to household wealth, prompting some households to move to bigger and better homes. For instance, equity prices rallied sharply even during the pandemic recession, thanks to unpreceded monetary and fiscal stimuli.
Meanwhile, there’s inflation, the rising cost of living, which undermines the value of monetary assets, pushing people to real assets like homes, which usually move in tandem with inflation. Home prices, for instance, doubled in the late 1970s, a period of high inflation.
The list of home market tailwinds continues with demographics, the aging of the baby-boomers, who move out of large homes to smaller homes and apartments, to people who move out of the cities to suburbs thanks to remote work.
Still, those who have been around long enough know very well that the fever pitch for homes doesn’t last forever. The cooling-off always follows it and, in some cases, the crashing of the market, as some people end up buying homes they cannot afford to keep. That’s what happened back in the early 1990s and then again in 2008-09, when home prices dropped sharply, a few months after the “sold all cash above the asking price” signs made their appearance around the U.S.
While it’s hard to figure out when the housing market will cool off, it isn’t hard to tell how it will happen: rising interest rates will cut off liquidity to the economy, including the housing market, putting the break on the demand side the market, as more homes are added on the other side of the market.