TLDR - What You Need to Know
In September, sales of previously owned homes declined by 2% compared to August, reaching an annualized rate of 3.96 million units, as reported by the National Association of Realtors (NAR).
Compared to September 2022, sales were down by 15.4%. This marks the slowest sales pace since October 2010, during the Great Recession. Two years ago, with mortgage rates at around 3%, home sales were running at a much higher pace of 6.6 million.
The current average rate on the 30-year fixed mortgage is about 8%. Limited inventory and low housing affordability continue to impede home sales, according to Lawrence Yun, NAR's chief economist. There were 1.13 million homes available for sale at the end of September, an 8% decrease from the previous year.
The median home price in September was $394,300, up 2.8% year-over-year, and bidding wars are common due to the supply shortage. First-time buyers accounted for just 27% of sales, historically lower than the usual 40%.
Mortgage demand has reached its lowest level since 1995, and all-cash sales made up 29% of all transactions in September, up from 27% in August and 22% in September of the previous year.
Why Should I Care?
Market Health Indicator: The housing market often reflects broader economic trends. A slowdown in home sales can be indicative of economic challenges, potentially affecting consumer sentiment and spending. Retail investors should monitor real estate trends as part of their overall market analysis.
Interest Rates Impact: The connection between rising mortgage rates and lower home sales is crucial for investors. It underscores the significance of interest rates on both the housing market and the broader economy. Rising rates can impact various sectors, such as banking and homebuilding, which may be part of a retail investor's portfolio.
Affordability and Supply: The housing affordability issue, highlighted by limited inventory and rising prices, can signal changes in consumer behavior. If potential homebuyers are priced out of the market, it might impact their ability to invest or spend in other sectors, potentially affecting related industries.
First-Time Buyer Trends: The historically low participation of first-time buyers can impact various industries, including retail. When individuals are not buying homes, they may have different spending patterns and financial priorities that retail investors should consider.
Cash vs. Financing: The increasing prevalence of all-cash sales indicates shifts in market dynamics. It may signal investor activity or changes in financial behavior driven by concerns about future mortgage rates. This trend can have repercussions in the real estate and financial sectors, affecting investment strategies.
How Can Investors Use This Information?
Value Investing: In a slowing real estate market, certain property markets may offer value opportunities. Look for regions or cities where prices have corrected, making properties more affordable. Value investors may find it beneficial to consider real estate investment trusts (REITs) with undervalued property holdings.
Growth Investing: While the overall market is slowing, some segments of the real estate market might still experience growth. For example, areas with strong job markets and population growth may continue to see demand for housing. Retail investors can research markets with growth potential and consider investments in property development companies or REITs specializing in these regions.
Momentum Investing: Investors following a momentum strategy can observe the market's reaction to changes in interest rates and home sales data. If certain real estate stocks or ETFs show positive momentum despite the broader market slowdown, this might present short-term trading opportunities.
Income Investing: Real estate has traditionally been a source of income for investors through rental properties or REIT dividends. Investors focused on income generation might consider investing in REITs with a history of stable dividends, even during market downturns.
Diversification: For those looking to diversify their portfolios, real estate investments can provide stability and non-correlation with traditional asset classes like stocks and bonds. Real estate crowdfunding platforms or REITs can offer retail investors access to diversified real estate portfolios.
Interest Rate Plays: Given the connection between mortgage rates and home sales, investors can consider investments in financial companies like banks or mortgage lenders. Rising interest rates might lead to increased profitability in these sectors.
Consumer Behavior Considerations: Retail investors should also consider how changing consumer behavior due to the real estate market impacts other sectors. For example, if more people are renting instead of buying, it could affect retail spending patterns, influencing investment decisions in retail stocks.