In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi examine the housing market’s fundamentals as the 2022 spring home-buying season kicks off.

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Listen to the REconomy Podcast™ Episode 34:

“Mortgage rates are really the wild card. We know that inflation, Fed tightening, and an improving economy should put upward pressure on rates, but all of the global uncertainty from the devastating Russia-Ukraine crisis may actually put downward pressure on rates. In the week ending March 4, mortgage rates actually declined, which was the first decline since December 2021. And the result was a 9% weekly increase in purchase applications. So, there's quite a bit of FOMO in the market when rates dip as potential home buyers want to capture the lowest rates possible.” – Odeta Kushi, deputy chief economist at First American

Transcript:

Odeta Kushi - Hello and welcome to episode 34 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hi Mark. It's almost that time of year. The birds are singing, the leaves are budding and prospective home buyers everywhere are hoping more inventory is headed their way. It's almost time for spring home buying.

Mark Fleming - Hi, Odeta Yes, it's probably the most important time of year for the housing market. This is the industry's peak season for sales transactions. And I suspect that many prospective home buyers, possibly you included, are hoping that this year's spring home-buying season will be less crazy than last year's. After all, could it get any more frenzied than it was? Two months supply of existing homes for sale last March? Prices rising rapidly. Barely 3% 30-year, fixed-rate mortgages. Ahh, those were the times.

Odeta Kushi - And that is exactly what we will talk about today. What to expect in the 2022 spring housing market. And it's looking like another competitive year, dare we say the most competitive in recent history?

Mark Fleming - Yes, yes, we dare say, and that is saying a lot because the 2021 spring housing market was red hot. In fact, the shortage of supply last year drove bidding wars galore. According to a Redfin analysis, over 70% of home listings last spring, experienced a bidding war.

Odeta Kushi - Well, I know a thing or two about bidding wars, unfortunately, as a potential first-time home buyer myself. But I digress. Before we jump into our spring housing market expectations, let's talk a little bit about seasonality in the housing market. Why is spring the peak season for home buying?

Mark Fleming - That's a great question and one best contemplated beneath the blooming cherry blossom tree. Hey, it's it's a Washington, D.C. thing, right? Home-buying activity tends to follow predictable seasonal patterns. Households like to move during the spring and the summer months. And we'll talk a little bit about that in a minute. But this means that those households put their homes up for sale and also seek to buy something in the spring and the early summer months.

Odeta Kushi - Okay, but that would mean that there should be big changes in the number of sale transactions during in-season months compared to off-season months. But that's not what we usually see in the statistics.

Mark Fleming - Oh, yes, great point. And this is where one has to read the economist's fine print. The most common metrics that we report in the housing market today, particularly around home sales, are what we refer to as seasonally adjusted. In other words, purposefully trying to smooth out all of that seasonal variation that we're going to talk about today. If one looks at non seasonally adjusted sales, it's abundantly apparent. In fact, you can get dizzy looking at it. We'll put a chart up on our Twitter feeds for everyone to see one of these. Between 2013 and 2019, on average, there were 1.75 homes for sale in June, usually the peak month, for everyone in January, usually the lowest month, so almost twice as many homes are being sold in the peak versus the trough. Additionally, the median home sale price on average was 13% higher, following that same seasonal pattern. So, 13% higher in June compared with January.

Odeta Kushi - And seasonal sale and price trends are typically accompanied by higher housing market velocity as measured by the median days on market and an increase in inventory through the early fall, as measured by the number of active listings of homes for sale. So, in short, supply and demand increase in the spring and summer months. In the fall and winter, the market cools down as home sales slow and the median price declines. Fewer homes are available for sale and those that are available stay on the market for longer.

Mark Fleming - That's right, so now more on the why this seasonal pattern typically hinges on several factors. Weather, you know economists love to talk about the weather and why it influences their statistics. Holidays, and most importantly, the traditional school year schedule for households with school-aged children. After all, as we've mentioned before, homeowners tend to also have families. Wait, wait, I need to be causally correct here. Families tend to own homes. Moving in the summer doesn't disrupt the learning during the school year. Who wants to pull their child out of school in the middle of their year and put them into a different school, so we tend to focus on that pattern. Warmer weather also makes it more convenient to move. The winter, meanwhile, brings a barrage of holidays, family obligations, colder weather, and who wants to move in the middle of a snowstorm. This seasonal pattern can become self-reinforcing. Households without children, well, they don't need to worry about necessarily trying to time to the school year, but they may still decide to move in the summer because inventory is higher and there are more homes to choose from. And maybe it's easier to take more time off from work in the summertime and, of course, sellers want to maximize their sale price, referencing that statistic we just talked about. And then buyers, often that same household as the seller, like more inventory to choose from. It reduces the FOBO effect, fear of a better option. See episode 27 from last year on that one.

Odeta Kushi - And COVID actually disrupted this usual seasonal pattern. We saw that the pause in April and May at the beginning of the pandemic extended the summer home-buying season into the fall and winter of 2020. You could argue that seasonality since then hasn't really been the same. The lack of inventory and white-hot housing market have left many potential home buyers unable to find something to purchase. And so those people are unlikely to walk away from the market until the spring season. There are also some longer term reasons that seasonality may be less in the future. For example, at a local level, weather is not likely to influence seasonality in regions that stay warm all year around. I can definitely make the case for seasonality where I grew up in upstate New York. I do not miss that lake-effect snow. But, that's not the case everywhere. And there's also a point to be made that an increase in extreme weather events can disrupt typical seasonality. Are there any other reasons?

Mark Fleming - Yes, I mean investors and second home buyers. Movements in mortgage rates are more consequential for these buyers and so they're not really worried about the seasonality that we just talked about. They're just trying to time it based upon mortgage rates. Markets with a higher or growing share of investor activity, therefore, should see less seasonality because investors and second home buyers are coming in and out, regardless of the seasonal effects. The second reason you already touched on. Demographic trends combined with the continued housing supply shortage stretched that buying activity past the traditional home-buying season. Millennials make up the largest share of first-time home buyers today. And this trend is likely to remain, as the largest generation continues to age into their prime home-buying years. The lack of inventory in a spring home-buying season and the resulting bidding wars leaves people at the end of the spring still looking for homes, unable to find something to purchase. So they stay in the market. It's unlikely they just simply walk away because they couldn't find something by June or July, and wait till the following spring. This, of course, helps those millennial households that may be less likely to be concerned with school. But, even then, they're still going to focus on - I still want something to buy. And particularly now, they're looking and saying well, rates will continue to go up, so prices will continue to go up. I still have that fear of missing out, so you're going to stay in the market longer. According to 2019 ACS data, only 51% of households headed by 24-to-39 year olds, this is your classic millennial home buyer, had children compared to 60% of those households in 2000. So they're staying in the market because they don't have to worry about getting their kids into school.

Odeta Kushi - Exactly. So there is a case to be made for weaker seasonality in the future. But, with that said, we still expect spring to bring with it more inventory and housing market turnover. So let's jump into exactly what we expect for this year's spring housing market. And it really depends on one thing, inventory.

Mark Fleming - Ah, yes. Inventory. I feel like we keep talking about inventory. We've been doing this for a few years now. We know that inventory in January hit an all-time low. We call it inventory turnover. That is the supply of homes for sale nationwide, new and existing, measured as a percentage of the total residential stock of homes. This percentage of inventory fell to 1.11. Yes, Odeta loves her detailed statistics. That's two decimal points right there. 1.11% of the total stock of housing out there. That means that only 111 in every 10,000 homes were for sale. That was a historic low. In January of 2021, the number was 1.2%. And, historically, pre-pandemic that percentage was 2.5%, so much, much more. So, in other words, we are entering the spring home-buying market, yet again this year, with record low inventory, even less than we had last spring.

Odeta Kushi - And you know the majority of inventory is existing-home inventory and existing homeowners are staying put. Average tenure length in the U.S. is over 10 years. And recently rising rates have further discouraged existing homeowners from moving. Because so many existing owners were able to refinance into rock-bottom rates, there's limited incentive for them to sell if it will cost them more each month to borrow the same amount of money. An increase in rates can leave existing homeowners feeling rate locked-in, disincentivizing them from selling their homes. Now looking ahead, mortgage rates are really the wild card. We know that inflation, Fed tightening, and an improving economy should put upward pressure on rates, but all of the global uncertainty from the devastating Russia-Ukraine crisis may actually put downward pressure on rates. In the week ending March 4, mortgage rates actually declined, which was the first decline since December 2021. And the result was a 9% weekly increase in purchase applications. So, there's quite a bit of FOMO in the market when rates dip as potential home buyers want to capture the lowest rates possible. Alright, so existing inventory may go up a little, but is likely to remain very low as we enter spring home buying. What about new inventory?

Mark Fleming - Well, when it comes to new inventory, home builders have been working really hard to break ground on more homes. In fact, single-family housing starts posted double-digit gains last year. Builders have a lot of homes in the backlog that they haven't been able to complete and bring to market due to all the supply constraints. Missing windows, appliances and things like that. If those supply chain issues resolved themselves this year, those new homes will be brought to market and add some supply relief. But is it enough?

Odeta Kushi - So I guess it depends, right? The supply shortage will get better or worse depending on how rate-locked existing owners feel. And if all of those pent-up new home completions can finally come to market. But, again, seasonal patterns tell us that more homes will likely come to market in the spring for some of the reasons that we mentioned. What about house prices this spring?

Mark Fleming - No surprises here given the significant shortage of supply. Annual house price appreciation has moderated from its peak of approximately 20% in August of last year, but it was still 18.8% in December. Hardly a significant slowdown and still very high by any house price, historic standard. Low inventory, rising rates and rising prices. Another sign that we're heading into a competitive spring sellers' market. Do you have a sense of deja vu?

Odeta Kushi - I do, indeed. Historically low supply and lots of demand is yet again the expected recipe for another bidding-war filled spring buying season. It's tough out there to be a potential home buyer. You can't buy what's not for sale, even if you can afford it. Alright, well that's it for this episode. We'll keep you updated on all things spring home buying as things progress, and thank you as always for joining us on this episode of the REconomy podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at economics@firstam.com. We love to hear from our listeners. And if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.