Housing: First In, First Out of Recession

New home sales rose 2.3% in December after November sales data were revised lower; the fourth quarter for sales was slightly stronger than the third quarter. New home sales are recorded at the contract signing so they better reflect current housing market activity. Cancellations, which have been on the rise, are not recorded in this data.

Sales ended the year 16.4% below 2021 levels. Residential investment dragged on growth for the seventh quarter in a row during the fourth quarter of 2022, falling 27% on an annualized basis. 

Rapidly rising home prices and doubling of mortgage rates contributed to the free fall in home sales in 2022. First-time home buyers were especially squeezed by affordability challenges. The rapid acceleration in mortgage rates was more disruptive than the level of rates. Now that mortgage rates have settled around the 6%-6.5% range, more buyers are willing to tour homes. Uncertainty and affordability contributed to almost 80% of buyers saying it is not a good time to purchase a home in the December Fannie Mae sentiment survey. 

Builders still have project backlogs, but many are resorting to concessions to lure buyers. The good news is that fewer builders had to rely on concessions in January compared to December, so sales activity could start to pick up again in 2023.  

Demographic tailwinds are in builders’ favor, as more millennials are aging into their prime home buying years. Mortgage applications to purchase a home climbed to the highest level since August of 2022 (before rates peaked at 7%) during the third week of January. Applications are still 32% below year-ago levels, but the pipeline is getting stronger.

Separately, sales of existing homes, which are recorded at the contract closing and reflect activity from a few months ago, fell for the eleventh consecutive month in December. Sales activity ended 2022 with five million homes sold, which is 18% below year-ago levels. All regions experienced annual declines.

Traditionally, the end of the year is a slower period for home sales. As spring approaches, more buyers are expected to enter the market, but listings remain lower than a year ago, which will keep a floor under prices in some regions. Existing homes available for sale in December were only at a 2.9 months’ supply at the current sales pace; homes are sitting on the market for longer on average. 

Sellers have slowly come back down to earth with respect to their listing prices. According to one realtor site, the number of homes sold above their listing price fell to 21% in January, which is more in line with pre-pandemic levels and significantly lower than the almost-60% peak in summer of 2022. The bad news is that many sellers are waiting out the period of falling prices to enter the market when conditions are more favorable. This holding pattern is expected to subside in the second half of the year, when economic activity starts to pick up again. 

Bottom line

Record-high home prices and doubling mortgage rates pushed the housing market into a recession in early 2022, with sales of all homes falling by more than a million units compared to the prior year. That was the largest annual drop since 2008 after the housing bust. The start of 2023 is showing promise as mortgage rates have settled slightly below their peaks. Both buyers and sellers are waiting on the sidelines for economic conditions to become more favorable. When the Federal Reserve cuts rates at the end of the year, the housing market is expected to rebound.