Homebuyer Contracts Unexpectedly DROP (-38% in San Francisco)

We just received some interesting news from the National Association of Realtors...

Their Pending Home Sale Index, a forward-looking indicator of sales that measures homebuyer contract signings, unexpectedly dropped in March. And it dropped by a lot.

The index declined by -5.2% on the month. And was down over -24% YoY. It was the 7th worst month for homebuyer demand in the US Housing Market going all way back to 2001.

The only other months with worse homebuyer contract signings in the history of this NAR Pending Sale Survey were:

• January 2023 (three months ago)
• December 2022 (four months ago)
• November 2022 (five mounths ago)
• April 2020 (lockdown)
• June 2010 (last crash)
• May 2010 (last crash)

I mean...yeesh. That's not good. And suggests that the 2023 Housing Market isn't even close to recovering.

Homebuyer Demand is Dropping Most in California

Especially in a state like California. Where the state, despite the best efforts of Gavin Newsom to give free money to homebuyers, is still seeing near record-low homebuyer demand.

According to the California Association of Realtors, closed home sales in March 2023 collapsed an astronomical 34% YoY. Remaining at close to the lowest levels ever recorded.

The declines in buyer demand were most ferocious in the Bay Area. Where, according to Redfin, sales were down 46% YoY in San Jose and 38% YoY in San Francisco through mid-April.

Sacramento, Riverside, Los Angeles, and Anaheim also got hit hard. With each region also experiencing near record-low homebuyer demand and contract signings.

Two Bottoms in the Housing Market: first Sales, then Prices

In one second we'll get into covering more markets (Florida in particular) in terms of their home sale performance. But before then - it's important to understand why this home sale data is relevant.

And that's because home sales tend to lead home prices. The first step in a housing crash is for sales activity and buyer demand to collapse. And stay low for a while. It's only then that prices start to make consistent, downward moves.

This relationship was evident in the timeline of the 2008 Housing Crash. Sales and prices both peaked in 2005. And by 2007 sales had fallen off a cliff, while inflation-adjusted prices only started to see a meaningful decline.

Note that in the last downturn home prices kept declining all the way until 2011. It took nearly five years of price declines for the market to bottom. Prices declined by an astronomical -36% in inflation-adjusted terms during that span.

And it's not just the 2008 Housing Crash that behaved like this. Almost every housing downturn in US History acts similarly. Consider the early 1990s Housing Crash for additional evidence.

Home sales and prices both peaked in 1988. Sales then plummeted over the next 2 years. While prices began a slow, gradual descent that lasted all the way until 1995.

All in all - it took 7 years to achieve the 12% decline in inflation-adjusted prices that took place in the 1990s crash. (Which - to be honest - wasn't really a national crash. It was more of a national housing purgatory for seven years. With big regional crashes occurring in California and the Northeast.)

The Uncomfortable Reality: Housing Downturns are LONG and DRAWN OUT

The data on the previous housing downturns in America presents what is likely an uncomfortable reality for many reading this post: Housing Downturns are LONG and DRAWN OUT.

There is no "quick recovery". There is rarely a massive price crash in the span of one or two years. Instead, a Housing Downturn is like death by a thousand cuts. After multiple years of subdued buyer demand, sellers will finally start to acquiesce and cut prices more meaningfully. Often coinciding with a downturn in the economy that promotes forced selling.

And prices will continue going down for years. But it will be slow. And some buyers might not even notice the declines at first because a house being reduced from $600k to $550k doesn't move the excitement needle much when mortgage rates are high and there's a recession in the economy.

But as time moves along, and you keep your attention to the housing data and listings in your market, you'll notice that there's more homes that fit your buy box. And eventually you'll find yourself getting a good deal.

Florida's Housing Market is Confusing

Which brings us to Florida. A Housing Market that is difficult to make heads or tails of right now. On the positive side for homebuyers, inventory is way up from last year.

The map below, which can be accessed using Reventure App, shows massive increases in inventory in metros like Tampa, Lakeland, North Port, Cape Coral, Ocala, and Port St Lucie. In all of these metros there are roughly 3x more homes for sale today compared to the same period in 2022.

Why is inventory increasing so much in Florida? Well, there's been a big drop in demand for vacation and second homes in the US Housing Market over the last several quarters. Data from Redfin shows that mortgage rate locks for second homes have crashed 52% below pre-pandemic levels. And 70% below their pandemic peak.

Less demand for vacation and second homes will obviously hit Florida's Housing Market hard. And it's showing up in higher inventory. However, despite these headwinds, I'm still hearing reports of bidding wars occurring across Florida. Home prices in Florida have also held steady. As a result, many remain convinced that Florida "won't crash".

But I think that mentality changes soon. Once the normal seasonal bump of buyers in Florida subsides over the next 1-2 months, I think you'll start to see some real price cuts hit. Similar to what occurred in markets like Phoenix and Austin last year.

And one market I really have my eye on is Miami. Because the underlying metrics there are not looking so hot. Home Sales in Miami are down -30% YoY according to Redfin, one of the biggest drops in America. Moreover, rents in Miami have started to decline. While hotels in Miami are seeing big drops in revenue.

All that adds up to home price declines coming to Miami's Housing Market, likely in the second half of 2023. The panhandle area in Florida will also likely get hit, given the big drops in home sales that have occurred in Panama City, Crestview, and Pensacola.

Has the Northeast downturn finally started?

Another interesting aspect of recent home sale data is what's occurring in the Northeast. It looks like we're finally starting to see a meaningful slowdown in buyer demand there.

In two markets in particular: New York and Washington DC.

Redfin is reporting a -32% decline in sales in metro DC. To go along with a -33% decline in nearby Frederick, MD.

Meanwhile - New York City, Long Island, and Poughkeepsie are down 25-30% on sales YoY.

Inventory in these markets is still low. So it might not feel like an improvement for homebuyers yet. However, if the decline in buyer demand persists, I suspect we will see inventory start to build up and prices go down.

A Parting Word on Inventory

This post focused almost exclusively on homebuyer demand (measured by sales). We didn't talk much about inventory today.

Right now inventory on the US Housing Market is still low at the national level. Driven mostly by a refusal of sellers to list their homes into a down market. This stubbornness from sellers is keeping inventory levels suppressed.

Don't be tricked into thinking your Housing Market is "recovering" just because inventory is low right now. As the recession gets worse, more owners will have liquidity needs and be forced to sell. Inventory won't stay low forever.

I will have an additional post with inventory updates for April 2023 coming later this week. So stay tuned for that.  In the meantime - comment below and let me know what you're seeing in your local housing market.

-Nick