The U.S. Market: A "Staggeringly Large Housing Contraction"

 

Second-quarter real GDP was revised to minus 0.6%. One of the culprits behind the surprise decline was a 5.6%, quarter-to-quarter decline in private residential fixed investment, shown below.

It looks like nothing on the chart, but one economist rated it a "staggeringly large housing contraction."

Residential fixed investment consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants. It also includes brokerage fees, which were down markedly in the second quarter. Residential fixed investment accounts for just about 5% of GDP.

It tends be a bellwether for the economy at large.

Our contention is that home prices follow home sales. The updated chart from our April issue, below, shows that total new and existing home sales are now in a near-vertical descent. Basically, it's another "air pocket." As we also said, these air pockets will eventually make their way into the economy at large, which is starting to happen. In July, existing home sales fell 20.2% from a year ago. Housing starts are another market leader. In July, the six-month rate of change fell to minus 18.6%. Except for a brief pandemic-induced decline in 2020, the deceleration is the most extreme since the housing crisis of 2006-2011. Back in 2006, housing starts topped in January, seven months ahead of the peak in home prices. The most recent peak in housing starts occurred in April, so the countdown is on for a concerted drop in home prices.

Many of the cities that led the real estate market on the way up are now doing so on the way down. Home sellers in former boomtowns have been quickest to lower asking prices. Not long ago, Boise, Idaho's real estate market was so hot that ABC, NBC and CBS all sent national correspondents to "cover the insane rise in home prices." Nearly 70% of home sellers in Boise cut their asking price in July.

Other formerly scorching markets -- in Denver, Salt Lake City, Seattle, Portland, Tampa and Sacramento -- saw 44% to 57% of sellers lower prices in July.

Nationally, Redfin reports that the percentage of sellers lowering their prices is the largest since it started tracking the data in 2012. The chart below shows the surge to 7.8% in the four-week rolling average.

The tide is turning.

This is a big change from just two months ago when Bloomberg Businessweek reported that "Americans Are Building Vacation-Home Empires with Easy-Money Loans." Housing bulls contend that mortgage lending standards never returned to the laxity of the mid-2000s so there was little to worry about. But Bloomberg reports that any distinction evaporated by June. "Over the last year, Wall Street firms have helped package hundreds of millions of dollars in mortgage-backed securities sold to institutional investors. Some were rated investment grade, others below."

In time, many of these securitized mortgages will fall into the "below" category.

The final peak in optimistic social mood found all kinds of other ways to make the public and institutional commitment to housing at least as gargantuan as it was in 2007. To cite just one example: There are so many house flipping TV shows that FortuneBuilders.com, a house flipping website, issued a list of the "Top 10 House Flipping Shows to Watch in 2022."

Meanwhile, the big flippers have gotten hammered.

In November, we showed what happened to Zillow's stock after the company entered the flipping game last year and then had to quickly exit because of losses. The stock is now down 84% from its peak in February 2021. The chart below shows what happened to the firm to which Zillow handed much of its flipping business. Opendoor Technologies, which The Wall Street Journal calls the market leader in automated home flipping, is down 89% from its peak in February 2021.

Virtual real estate sports similar losses. Yes, that's right, virtual real estate. Fake is now real.

At the end of 2021 and in early 2022, people spent millions on parcels of land in the metaverse, digital property that exists only in online spaces. From February to June, the average price of land in the metaverse fell 80%, from $16,300 to $3,300. Since November, trading volume is down 97%.

"Even if the land is virtual, the pain is real," said one tweet.

And it is moving into the real world.