Executive Summary
Existing home sales, which exclude new homes, fell about 5% in January 2025 (see inset box of first graph for 12-months). In addition to sales declining, the median price of existing home sales fell for the third month in a row in January, coming in at about $397,000 (second graph). It appears consumers are becoming more fearful of inflation and the economy, as the third graph shows a University of Michigan -Consumer Sentiment Index reading close to economic cycle lows. Some experts say prices have not fallen due to a shortage of inventory; however, the FRED graph below does not agree. Combine all this with 30-year mortgage rates still near 7%, and prices need to fall for affordability. Recent data seems to point to home prices falling from bubble highs.
For further analysis, continue to read The Details below for more information.
“My daughter asked me when she came home from school, ‘What’s the financial crisis?’ and I said, it’s something that happens every five to seven years.”
–Jamie Dimon, CEO of JPMorgan Chase
The Details
The data indicates that the housing market, along with the economy, is slowing. Existing home sales, which represent about 90% of total home sales, fell about 5% in January to a seasonally adjusted annual rate of 4.08 million. Notice in the graph below, this puts the level of sales around the level seen near the bottom of the Financial Crisis. And this graph has not been adjusted for the growth in the population. Since 2000, the population has grown about 23%. If the numbers below were adjusted for this growth, the level of existing home sales would fall below the lowest level experienced during the Great Recession in 2008-2009.
In addition to sales dropping, the price of existing homes, which soared after the pandemic, finally turned the corner and began their descent. The median price of existing home sales fell for the third month in a row in January, coming in at about $397,000. See a graph of median home prices from VettaFi below.
The slowdown in home sales makes sense when looking at the University of Michigan’s Consumer Sentiment Index. The Index, which measures the consumer outlook for the economy, personal finances, business conditions, and buying conditions, plummeted to its lowest level in 15 months. Fear of inflation, job stability and debt loads are weighing on the consumer. The graph below from VettaFi displays a current reading closer to the bottom of economic cycles than the top.
The population-adjusted level of new home sales, shown below, is also scraping the bottom of the barrel, now at the level seen at the start of the Great Recession.
Many industry experts claim that the reason home prices have not fallen much is due to the lack of inventory for sale. However, the graph below illustrates that housing inventory divided by the population is at its highest level since the turn of the century.
In many communities across the nation, housing inventory is soaring as consumers retreat. A main contributor to this behavior is the jump in mortgage rates from a low of 2.65% in January 2021 to around 7% today.
The rise in mortgage rates alone has eliminated home buying for many households. As an example, using the median sales price above of $397,000, assuming a 20% down payment, and financing the balance of $317,600 over 30 years, results in a mortgage payment (excluding property taxes and insurance which likely have also risen) that is 65% higher today than in January 2021. In dollars, a household would be paying $2,113 per month today versus $1,280 at 2021 rates.
The drop in consumer sentiment along with significantly higher mortgage rates and rising housing inventory means housing prices should continue to fall this year, and likely next. Much will depend upon the path of the economy and any new government stimulus initiatives. House prices, like stock prices, are at record overvaluation levels. Any pullback in the economy will probably lead to a corresponding retreat in prices. Home prices are also in a bubble.
The S&P 500 Index closed at 6,013, down 1.7% for the week. The yield on the 10-year Treasury Note fell to 4.44%. Oil prices decreased to $70 per barrel, and the national average price of gasoline according to AAA fell to $3.15 per gallon.
© 2024. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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