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Existing Home Sales Plunge; Biggest Year-on-Year Drop Since 2011

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Here’s another sign that the air is coming out of housing bubble 2.0.

Existing home sales fell 10.3% year-on-year in December. Sales, including single-family houses, townhouses, condos, and co-ops, dropped to a seasonally adjusted annual rate of 4.99 million homes, according to the National Association of Realtors. This ranks as the biggest year-over-year drop since May 2011 — in the midst of Housing Bust 1.0.

Some analysts speculate that the partial US federal government shutdown contributed to the sharp drop in December sales. Because the federal government involves itself heavily in home lending through programs like FHA, closings have been delayed. But the National Association of Realtors said the shutdown “has not had a significant effect on December closings,” because it started too late in the month.

The real boogyman is rising mortgage rates.

According to WolfStreet, “Mortgage rates ticked up from 4.2% in December 2017 for an average conforming 30-year fixed rate mortgage, to 5.2% at the peak in mid-November, according to the Mortgage Bankers Association. Then mortgage rates fell sharply and hit 4.75% by mid-December.”

Analysts expected a drop in home sales last month, but they did not anticipate such a sharp decrease. The Wall Street Journal projected a drop from the November sales rate of 5.33 million to a December rate of 5.25 million. The plunge to 4.99 million “was sort of a wake-up call,” according to WolfStreet. It was the lowest sales number since May 2015.

Here’s the breakdown of December home sales by region.

  • Northeast: -6.8%, to an annual rate of 690,000.
  • Midwest: -10.5%, to an annual rate of 1.19 million.
  • South: -5.4%, to an annual rate of 2.09 million.
  • West: -15.0%, to an annual rate of 1.02 million.

The supply of unsold homes is rising, but there remains a shortage of affordable houses. According to the NAR report, “there is still a lack of adequate inventory on the lower-priced points and too many in upper-priced points.”

Home prices rose sharply as the Federal Reserve pumped up Housing Bubble 2.0 with nearly a decade of artificially low interest rates.

We could see some improvement in home sales in January as mortgage rates have dropped (thank you Powell Put), but the government shutdown may well impact that number.

According to WolfStreet, we’re seeing the air seep out of Housing Bubble 2.0. It’s an inevitable function of Fed monetary policy. It summed things up this way:

Housing markets move slowly and normally play out over years. Big sudden moves even in local markets are rare. On a national basis, Housing Bust 1 took over five years to play out and was helped along by over 10 million job losses and a banking system that was teetering on the brink.

“This housing downturn moved into the scene in 2018, a year when the economy was strong and created 2.6 million jobs. This downturn has been triggered by sky-high prices and rising mortgage rates, not by a recession or job losses. Those events – unavoidable as part of the business cycle – are still waiting in the wings.”

As Peter Schiff has said, the housing market is a leading economic indicator signaling the impact of rising interest rates on the broader economy.

If the US economy is really going to stay strong and if interest rates are going to keep rising, how is it possible that the economy can continue to stay strong with high interest rates when the economy, or the strength of the economy, is predicated on debt?”

But will the Fed’s sudden dovish turn be enough to pump some air back into the housing bubble? That remains to be seen. But Peter doesn’t think it will be enough to rescue the economy. As he put it in a podcast last week, the recession is a done deal.

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