The National Association of Realtors predicts sales to rise again throughout 2023. At the same time, demand for mortgage refinances are down 83% from a year ago. Applications for a loan to purchase a home were 18% lower than the same week one year ago. Signed contracts to purchase existing homes dropped 20% in June compared with the same month a year ago according to the National Association of Realtors. Inventory jumps (above is Denver, CO) How accurate is their prediction of rising sales?
What is in the mortgage market data?
Applications for a loan to purchase a home fell 1% for the week but were 18% lower than the same week one year ago. More supply is coming onto the housing market, as competition cools among buyers. But prices and rates are still high, and inflation is weakening consumer confidence.
Increased economic uncertainty and prevalent affordability challenges are dissuading households from entering the market, leading to declining purchase activity that is close to lows last seen at the onset of the pandemic,” said Joel Kan, an economist at the Mortgage Bankers Association.
Applications to refinance a home loan fell another 4% for the week and were 83% lower than the same week one year ago. The average rate on the 30-year fixed mortgage was 3.01% a year ago. Most borrowers have already refinanced to far lower rates than exist today. The refinance share of mortgage activity decreased to 30.7% of total applications from 31.4% the previous week.
What is happening currently with home sales?
Signed contracts to purchase existing homes dropped 20% in June compared with the same month a year ago, the National Association of Realtors said Wednesday.
That is the slowest pace since September 2011, with the exception of the first two months of the coronavirus pandemic lock downs, when sales plunged briefly and then rebounded sharply.
On a monthly basis, pending home sales fell a wider-than-expected 8.6% in June. A Dow Jones survey of economists had predicted a 1% drop.
National association of realtors predicts big rebound in 2023?
With a plethora of bad news on mortgage applications and declining home sales, the National Association of realtors in their midyear update is now forecasting total sales for this year will be down 13%, but that they should start to rise in early 2023. Lawrence Yun, chief economist for NAR, said “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”
Redfin not buying the NAR predictions and neither should you
At the same time NAR issued their mid year updates, Redfin announced an 8% cut in their workforce. “We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive,” Redfin Chief Executive Officer Glenn Kelman wrote in a blog post about the layoffs.
Others in the market are not buying that the decline in volumes is a short term blip with a recovery next year. National Mortgage news started a list of layoffs in the mortgage industry with hundreds of different companies announcing thousands of layoffs.
The NAR forecast is way off target and predicted on a false hope that mortgage rates start to decline next year which should theoretically bring back demand. With inflation becoming deeply entrenched I think this is an overly rosy assumption. Myself, like the overwhelming majority in the industry, see a continued slowdown in 2023 which is why companies from Redfin, Compass, various banks, etc.. are “rightsizing” their headcount to bring in line with the future of substantially lower transactions.
Where does real estate go from here?
With rates continuing to rise, demand falling, and inventory increasing in many markets there are some challenges ahead for the real estate industry.
- Volumes: There hasn’t been much focus on real estate volumes. With a huge pull back in refinancing along with slower sales, the industry is going to have substantially more layoffs of realtors, bankers, title companies, inspectors, etc… All these jobs are predicated on volume, as the number of closings decline, there is substantially less need for the enormous headcount at the various companies throughout the industry. Furthermore as sales decline, ancillary businesses will get hurt from remodeling companies to home supply/décor, etc… Regardless of what happens to prices, the huge slowdown in the volume of real estate transactions is going to be extremely painful for the industry. Look for considerably more layoffs later this year.
- Prices: it is impossible to imagine that prices will continue to increase with rising inventories and slowing demand. The real question is how far will prices drop. In certain markets like Boise that went up so quickly you could see 40-50% drops in prices, in most other markets you are in the 10-20% range. Don’t buy the notion that inventory is so tight that there will be no price declines. We are already seeing this notion debunked with new house builders now offering incentives to buyers.
Unfortunately there is not much good news in any of the recent metrics from new home sales to mortgage demand everything is pointing to continued pain ahead. Furthermore the market is not buying the predictions of the National Association of Realtors of an increase in prices and stabilization of volumes next year. When I am looking at predicting the future, I focus on where the money is going. In this case, Redfin and countless other businesses involved in real estate are bracing for a long term shift in the market to slower sales, less volume, and flat to declining prices. I would bet that the hundreds of companies downsizing are correct and we are in for a longer term reset in the real estate market.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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