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Cheating at Solitaire

Updated: Jul 20, 2023

Despite January’s dive in existing home sales, analysts expected new home sales in February to rebound slightly from January's drop, but they were wrong. …Again.

New home sales actually fell 2%, and worse yet, January's 4.5% drop was revised drastically worse to an -8.4% bricks-tied-to-the-body-bag sort of plunge. New home sales are now down 6.2% year over year, which is down YoY for the ninth straight month, and the average new home sales price topped $500k for the first time ever.


The most recent National Association of Home Builders/Wells Fargo gauge of homebuilders’ sales expectations for the next six months decreased to 79 from a revised 81 last month-- the lowest since June 2020-- as concerns over both rising construction costs and higher interest rates continued to grow. It seems reasonable to suspect this is far from over as mortgage applications in the last week tumbled once again, now at their lowest since pre-COVID seasonal lows.

In its latest existing home sales report, the National Association of Realtors’ (NAR) chief economist Larry Yun warned that "housing affordability continues to be a major challenge, as buyers are getting a double whammy: rising mortgage rates and sustained price increases." Bank of America joined the chorus last week, warning that last year's housing exuberance is unlikely to repeat and that this year will be much more challenging for the housing market given the significant headwinds to affordability and ongoing supply-side challenges.

Among the numerous headwinds already facing the US housing market, BofA warned that the Russia/Ukraine conflict adds a new factor to the mix. The conflict is causing higher oil and commodity prices that will weigh on consumers’ ability to spend elsewhere. Moreover, it increases uncertainty and recession concerns, and it supports higher input costs for builders.

According to Bankrate, this year’s torrid pickup in mortgage rates has led to the average 30-year fixed mortgage rate reaching 4.5%, the highest since 2018 and up almost 100bp from the December average of 3.26%.


The NAR affordability index provides a way to understand interest rates’ impact to housing demand. Booming home price appreciation last year contributed to diminishing affordability, with the NAR index down 14.7% YoY in December (the latest data point).

The massive move in rates this year suggests that the affordability index will see another significant move lower. Paradoxically, further strong home price gains might actually add to the affordability pullback-- BofA currently expects 10% appreciation in the Case-Shiller National Home Price Index this year, largely due to a continuation of the historic supply:demand imbalance.


Calculating the implied mortgage based on Zillow home prices and current mortgage rates, BofA finds that the mortgage payment/rent ratio has also been on the rise and is nearly back towards the high of the prior business cycle. That said, the ratio is less than one, suggesting it is still better to buy than rent.

That’s nationally, though. Unfortunately, California gets hit particularly hard when that ratio increases. According to NAR, three of the top six metros in the country where it is a lot more expensive to own than rent include San Jose/Santa Clara/Sunnyvale (#1), the San Francisco/Oakland/Hayward Bay Area (#2) and San Diego/Carlsbad (#6). (Where’s Newport? Scratches head.)

Of course, this ratio does not account for property taxes or other expenses tied to homeownership, which are particularly high in these areas. When those are included nationally, it's more or less a toss-up whether one should rent or buy, but in California’s metros, it’s not even close.

That doesn’t mean that we recommend selling your house. We have been hearing frequently of late from clients who are considering selling their residence, but there’s really no place for them to move. There just isn’t much within reason to buy, and rentals are scarce. Plus, their mortgage rate and property taxes will be higher. …It may feel good to make $2 million on you house, but if you don’t have anyplace to go, you’re just cheating at solitaire.

On the other hand, for a family who has a perfectly good rental, we don’t think this is a great time to buy. (That’s how I would say it if I wanted to put it mildly, even though I know that’s not why you read this column.)

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