There is little doubt now that real estate is showing some major signs of weakening. This is not completely surprising since the market peaked, in the United States, last June. Since that time, it was a sideways-to-lower moving market.
For those who are unaware, the real estate market doesn't operate like other markets. Typically, a peak is not a reversal but, rather, a rounding pattern. What this means is the top is hit and then it slowly changes path.
The reason this is comes from the fact real estate is always local. Those in the business always talk about it yet those who look at things from the outside rarely remember that. For this reason, some markets are tanking while others are holding strong.
Nevertheless, the bad news often spreads. It now looks like real estate is in for some tough days ahead.
Leading Indicators
On my channel, we often talk about leading versus trailing indicators. This is something that many confuse, often looking at the wrong metrics.
For example, the latest CPI read is a trailing indicator. If you want to forecast, look at something like inventories.
When it comes to real estate, the best glimpse into the future comes from the mortgage industry. That is the starting point for most transactions. While there are always cash buyers, the reality is the market is always moving based upon those who are getting loans.
If the mortgage brokers are seeing business dry, up, that is a huge indicators of turmoil ahead. Earlier in the year, we saw the start of layoffs in that industry. Each real estate pullback, this is what happens. When there is little business for mortgage brokers, they start letting people go.
Since June, the week-over-week mortgage applications were dropping. This was a sign the top was in. Now we see levels that are truly horrific.
Sales Dropping
It should come as no surprise that real estate, in many markets, is dropping. We are getting reports of builders who are discounting prices the second they put a home on the market. That is not a good move for those who have contracts. The first wave of cancellations is already hitting. This is only going to get worse as more starts to hit the market.
Last week, National Association of REALTORS came out with their monthly report. It was not pretty as you can imagine.
Existing-home sales dropped for the fifth straight month in June, according to the National Association of REALTORS®. Three out of four major U.S. regions experienced month-over-month sales declines and one region held steady. Year-over-year sales sank in all four regions.
Notice how this was the 5th straight month. Here we are seeing a trend. The talking heads on television are always discussing when the housing collapse will start.
Guess what Bobo, it already started.
Total existing-home sales completed transactions that include single-family homes, townhomes, condominiums and co-ops, dipped 5.4% from May to a seasonally adjusted annual rate of 5.12 million in June. Year-over-year, sales fell 14.2% (5.97 million in June 2021).
Of course, this is all being blamed on rising interest rates. Certainly that didn't help matters and I am very critical of the Fed. However, let's be honest, the market peaked last June. This is actually operating like a normal real estate top.
One more piece from NAR:
Total housing inventory2 registered at the end of June was 1,260,000 units, an increase of 9.6% from May and a 2.4% rise from the previous year (1.23 million). Unsold inventory sits at a 3.0-month supply at the current sales pace, up from 2.6 months in May and 2.5 months in June 2021.
There is that word again: inventory.
Do you know what that means? Simply put, things are not selling like they were. When sales slow, inventories tend to rise until things adjust to the new levels of activity. With moves so quick, nobody had time to do that.
This is a situation to keep our eye on. Real estate makes up a significant percentage of economic activity. If that starts to head south in an accelerating manner, recession will bowl us over.
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