Thanks to @EPBresearch, we have this nice breakdown.
The second half of 2022 was historic for the US housing market
Transaction volumes froze
Prices started to decline
Here’s an unbiased and data-backed update on the US housing market heading into 2023
When analyzing the housing market, we must separate “transaction volume” and “price.”
Volumes always lead prices, so let’s first take a look at housing volumes.
The housing market is split into two segments: existing homes and new homes.
Existing home sales make up about 85% of total housing transactions.
At the end of 2020, existing homes were selling at an annual pace of 6.7 million.
We’re approaching 4 million to start 2023.
Existing home sales volume has dried up by ~40%.
While sales volume collapsed, the inventory situation is still very “tight”
The months supply of existing US housing is just 3.3.
A balanced market where prices usually neither rise nor fall is about 5.0.
The new construction market (15% of total sales) is a bit different.
Sales volume is down a similar 40% but the months supply has exploded from under 3.5 to 8.6!
Recent months have shown an increase in new home sales but there is a caveat.
Many buyers have been “canceling” their new home purchases
Cancellations are not reported by the Census Bureau
Data from (Twitter) @JBREC/@RickPalaciosJr shows us that the cancellation rate, or the difference between gross & net sales, exploded to more than 20% at the end of 2022!
What does this mean?
It means that new home sales volume is likely overstated and the months supply of new homes is likely understated.
More on this later…
If we take the data at face value, total US housing volumes have declined from an annual sales pace of 7 million to 4.2 million.
The speed of the decline is dramatic, which is why many reports declare the housing market is “frozen.”
The months supply of total US housing is 4.1.
Remember a “balanced” market is about 5.0 so the US housing market has had “tight” inventory since 2016.
The months supply of total US housing at 4.1 is made up of:
Existing home months supply of 3.3
New home months supply of 8.6.
There has never been this big of a gap before, which is confusing many analysts that aren’t willing to consider this nuance.
Many people said home prices could not fall because inventory was too tight.
Home prices are falling already, which caught many people by surprise who only look at total US housing inventory.
A simple analysis actually shows that new home months supply is a better indicator of future home price growth compared to total US housing months supply.
Why is that?
Likely because home builders are price setters in many communities and this impacts the comparisons.
So home prices are falling despite “tight” inventory because new home inventory is not tight at all.
In fact, if we factor the cancellation data, new home months supply is likely well over 9.0 which is the highest level since the 2008 crisis.
Now let’s talk prices.
Nationally, home prices have peaked and are declining as we move into 2023.
Based on Case-Shiller data for October, home prices nationally are down an average of 2.4%.
This is likely closer to 4%-5% once the November/December data comes in.