A genuine housing slowdown
I came across a MarketWatch article this morning titled, Housing market has hit a ‘significant slowdown’ in recent weeks, Redfin CEO says, which quotes Redfin’s chief executive as saying he has seen a “significant” slowdown in the past few weeks that could continue in coming months.
The housing market hit a sudden and “significant” slowdown in the past few weeks that could continue in coming months, Redfin Corp.’s chief executive said Thursday afternoon.
Chief Executive Glenn Kelman reported that Redfin had pulled down its forecast after “an unexpected drop in Redfin’s bookings growth in the past three weeks, slowing traffic growth in a weakening real-estate market.”
MaerketWatch – Housing market has hit a ‘significant slowdown’ in recent weeks, Redfin CEO says (August 10th)
Some background analysis
I have attached some charts I put together from my February 28th financial update that demonstrate the typical behavior of the real estate market. It seems that housing sales fall first, prices fall second, and then this drop works to affect other markets as well (especially stocks last decade).
House sales top out in late 2005 (chart)
Home prices gain into the 2006 Spring selling season as sales fall hard (chart)
house sales drop as mortgage rates rise (chart)
Have house sales topped? (There is a lag on completed transactions) – Chart
Last decade, housing sales top and then stocks follow (by two years) – Chart
Home prices fell first in 2006, then stocks followed 18 months later (chart)
Keep this in mind. We have discussed on a number of occasions that the housing market does not necessarily respond adversely on a large scale to higher mortgage rates. The Unites States real estate market was buffeted by a regime of higher 30-year mortgage rates in the late 70’s early 80’s, but prices overall still rose. With higher long rates, we need to see what is causing them to rise.
Now, last decade’s actions by the US Fed caused real estate to fall as much of the mortgage origination business was tied to adjustable rate mortgages (ARMs). These mortgages were tied, at least indirectly, to the fed funds rate. As the USFed increased the Fed funds rate these ARMs became unpractical and the market eventually responded accordingly.
Tax policy changes have always affected real estate prices
We discussed in prior posts that Internal Revenue Code (IRC) changes to real estate have always affected the market. I analyze this in detail in my July 30th housing update.
I submitted to you that the latest round of tax cuts and IRC changes (Tax Cuts and Jobs Act of 2017) are severely impacting the higher end of the real estate market. Major elements of the tax code changes affecting real estate include limiting deductions for state and local income taxes (SALT) and property taxes and further limiting the mortgage interest deduction.
As you can see, since the IRC changes were phased in this year, house sales and activity have slowed noticeably. Eventually, all residential markets will be affected by these IRC modifications. As higher-end RE falls, this will trickle down to the working class neighborhoods as well, which aren’t directly affected by the IRC changes.
“We aren’t entirely sure how much of it is the market and how much of it is us because our guidance is based on a slowdown that only occurred in the last few weeks. It was a significant slowdown. It may be that we have a good week this week and a good week next week and we can outperform it. But we are seeing a significant change.”
“My guess is that only some of it is driven by the environment. It is definitely changing.”
Chief Executive Glenn Kelman – Redfin
The MarketWatch article also discusses the observations and forecasts of Zillow.com. On Tuesday, Zillow reined in its revenue and earnings projections in the light of this sudden slowing in sales and overall activity.
Zillow also had issues after its earnings report earlier this week, falling 16.3% Tuesday after also announcing a forecast that was weaker than expected.
MarketWatch – Housing market has hit a ‘significant slowdown’ in recent weeks, Redfin CEO says (August 10th)
Anticipating the trend before it manifests is the way to stay ahead
There are cycles in every asset class and just because the US Fed and other central banks can indefinitely suspend the business cycle this does not mean we can’t anticipate changes in advance. We need a good understanding of Economics and an objective mindset, so that we can adjust our investment decisions. We need to account for the outside forces of central bank and IRC policy. However, all of this ostensible uncertainty provides the wise person with opportunity.
Let’s keep our powder dry, because as they say in the real estate business, the worm has turned.