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BofA: "High hurdles to rebalance the existing home market"

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by Calculated Risk on 5/23/2022 02:46:00 PM

CR Note: This analysis is similar to many of my comments in What will Happen with House Prices?

A few excerpts from a BofA research note: High hurdles to rebalance the existing home market .

As the Fed now tries to slow the economy down, housing will be front and center as one of the main interest rate-sensitive sectors.

As we have been writing, mortgage rates have spiked this year to around 5.5% creating a record affordability shock. This should lead to a major pullback in home sales and turnover. However, home prices will likely continue to move higher, and we recently revised up our home price appreciation forecast this year to 15%.

It is hard to understate how tight the housing market is right now. The key metric to
gauge the supply-demand imbalance is existing homes months supply, which is at a
historically low level of 2.2 months as of April. As we recently pointed out in Fed
throwing shade on hot housing market, months supply has a strong historical inverse
relationship with % mom home prices. The record tightness therefore helps
explain the record gains in home prices.

Click on table for larger image.

Looking at the long history, a balanced market is likely closer to 5-7 months. To get from
2 months to 5 months would take some pretty big changes and swings in the existing
home market. To assess this, we create a matrix for months supply with varying
assumptions for weaker home sales and greater inventories. A combined 20%
pullback in existing home sales and 20% increase in inventories, would add slightly over
1 month to months supply, bringing it up to 3.3 months. To get back to 5 months and
the minimum threshold for a balanced market, it would take more severe moves in the
range of 40% for both.
emphasis added

Earlier this month I wrote:

If sales decline to 5.0 million SAAR, inventory would have to increase to around 2.5 million units to reach 6 months-of-supply. This also might seem unlikely and would seem to argue for the slow house price growth scenario; however, I think there are reasons we might sales decline to around 5 million SAAR. We could see a wealth effect from the recent decline in the stock market and speculative assets. Also, my suspicion is household formation will slow (I think there was a sharp increase in household formation in 2021 that will slow later this year).

I’ll have more on household formation later this week.

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