Consumer Housing Sentiment Lowest in a Decade

Fannie Mae's July consumer housing survey shows the worst sentiment in a decade. 83% of respondents think it is the wrong time to buy a house.

Existing Housing sales fell 6% from June sales bringing the decline to 20% from July 2021. Except for a brief period at the beginning of the pandemic, it has become the slowest sales since November 2015.

Although sales are slowing, the average house cost is still 10.6% higher than in July 2021. Historically, price and existing home sales move along a generally similar trajectory. There has been a slight and predictable delay between the decrease in sales to price corrections. Since July 2021, prices and sales have diverged. The chart looks like the gap is widening.

The blue line represents housing prices. The broken line is existing home sales.

If history is a reliable predictor, widening indicates the market will reach a tipping point and then has a sharp correction coming. This is the same chart pointing to patterns showing a similar setup going into 2008. In addition to decreasing sales, there is a significant increase in deals not closing. About 63,000 deals fell through in July, representing 16% of the total July real estate transactions. The number for new build cancelations is 17.6%. For comparison, the overall rate in July 2021 was 12.5. The two primary reasons for the high cancellations are that buyers no longer qualify for the loan due to higher interest rates/ monthly payments, and consumers feel inflation has made the house unaffordable.

First-time home buyers usually represent about 40% of monthly home sales. In July, first-time home buyers were 29%. “Affordability is the key concern right now in the housing market,” says Jessica Lautz, National Association of Realtors, vice president of demographics and behavioral insights. “Both home prices and mortgage rates have risen, shutting the door on many potential first-time home buyers, who are having a difficult time.” Rising rental rates make it even harder for first-time buyers to save up a down payment. Less qualified first-time buyers forecast a long and dangerous downward trend in housing.

Builders are noticing the slowdown in consumer demand. Housing starts dropped 9.6% from June and are 8.1% lower than July 2021. On average, builders make an 18.2% profit on a new home build. The current median new home costs $428,700. It is safe to say builders will churn out as many new homes as they think the market will support to make as much money as possible. When builders slow the rate at which they are applying for permits, it is usually indicative that the market is changing for the worse.

There is a historical gold to housing ratio that shows the relationship between the price of gold and the price of real estate. The ratio measures how many ounces of gold it takes to purchase the average house. The historical average since 1975 is 218. When the ratio is below 218, housing is cheap compared to gold. When the ratio is above 218, gold is cheap compared to housing. In July 2008, the price of gold was $920, and the average housing price was $237,300. The ratio was 257.93. The market crashed at the end of September. Initially, the price of gold fell but then went straight up. In August 2011, the gold price was $1,825. The ratio had dropped to 120.32. Gold went on a multiple-year decline, and real estate went on a multiple-year growth. The current ratio is 242.42. History is saying real estate is overvalued and gold is undervalued.

Is your portfolio able to withstand another 2008? Multiple indicators are flashing problems for housing, which will spill over across the economy. Gold historically performs very well when the gold to housing ratio is above 218; right now, it is 242.42. At today's gold prices, housing would need to drop by at least 12.36% to bring the ratio into historical balance. Don’t put this off any longer.

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