“The cure for high prices is…high prices”
Sounds like a zen mindbender at first, but it’s actually Supply and Demand 101. Demand pushes prices higher, speculators load up expecting higher prices – you know what happens next: price hits a point where demand dries up and then price starts falling…
That’s how pump and dump schemes work, it’s how the oil markets, it’s why gold has been rocketing higher – and it’s why New Home Sales fell to 623,000 in May. That’s a -13.7% drop from April and a -6.3% drop from May 2024. Home prices may take longer to adjust.
Back in February, there’s was an 8.9 month supply of homes. As of May, there is now a 9.8 month supply of new homes in the market – the highest reading since 2022 and…gulp…2009.
Now, a quick look at mortgage foreclosure rates should pretty quickly stifle any “GFC all over again” hysteria:
The problem is affordability. Even with supply at high levels, new home prices are still rising – up 3.7% to a median price of $426,000. That’s a monthly payment of $2,834 at current mortgage rates.
The Atlanta Fed says that on average, home prices have jumped 45-55% in the five years since COVID and nearly doubled over the last decade. Income gains have not come close to keeping pace with the boom in home prices…
And unfortunately for buyers, the chart above suggests there isn’t going to be any forced selling to push home prices lower any time soon. Current homewners are mostly boomers who are locked in at much lower mortgage rates and have no problem meeting their financial obligations.
Plus, if mortgage rates fall in a meaningful way, it’s pretty likely that there will be surge in buying interest from younger generations like the millennials, who currently account for just 24% of existing homes sales.
Yes, the rate of price appreciation for homes has slowed, but it’s hard to imagine a scenario that make homeownership more affordable. A recession would probably just lead to less inventory as sellers pull their listings.
And please let’s not talk about subsidizing homebuyers, all that will do is push prices higher and transfer taxpayer money into homesellers pockets and add to the deficit.
Seems weird, but with housing, there may be no simple cure for higher prices until the boomer generation start downsizing or moving into assisted living facilities.
Take Care,
Briton Ryle
Chief Investment Strategist
X/Twitter:https://twitter.com/BritonRyle
