Is buying sentiment pointing to a crash in home sales? - Capital Economics
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Is buying sentiment pointing to a crash in home sales?

US Housing Market Update
Written by Matthew Pointon
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Record low inventory, surging house prices and stretched affordability have pushed the share of households who think now is a good time to buy a home to the lowest since 2010. But, at the same time, the share who plan to buy a home in the next six months has been trending up. That implies some households are buying now because they have to, perhaps because they need more space to work. With lots of pent-up demand, the decline in sentiment points to a moderation, rather than crash, in sales.

  • Record low inventory, surging house prices and stretched affordability have pushed the share of households who think now is a good time to buy a home to the lowest since 2010. But, at the same time, the share who plan to buy a home in the next six months has been trending up. That implies some households are buying now because they have to, perhaps because they need more space to work. With lots of pent-up demand, the decline in sentiment points to a moderation, rather than crash, in sales.
  • Measures of home buying sentiment have fallen back in recent months. In February, Fannie Mae reported that just 48% of households saw now as a good time to buy, the joint lowest reading since the survey began in 2010. And the good time to buy share on the University of Michigan survey dropped to 62% in January. Excluding the immediate aftermath of last year’s lockdowns, that’s the lowest reading since 2008.
  • The decline in home buying sentiment is in some ways not a surprise. Record low inventory, surging house prices and stretched affordability have all depressed optimism on the purchase environment. But more unusually that fall in sentiment has not translated into lower home sales. Indeed, on past form, the current level of the University of Michigan measure would be consistent with existing home sales falling 20% y/y, rather than their recent gains of over 20% y/y. (See Chart 1.)
  • That divergence seems to reflect the fact that, while relatively few households think it is a good time to buy, a decent share still plan to buy a home anyway. An alternative survey from the Conference Board, which instead asks if households are planning to buy a home, has edged up in recent months. (See Chart 2.) That marks a reversal from the situation between 2008 and 2017, when relatively few planned to buy despite a large share saying it was a good time to do so. That earlier divergence probably reflects the impact of the financial crisis on mortgage markets, with many households unable to buy even if they wanted to.
  • The discrepancy today implies many households are buying now because they have to, rather than because they want to. The impact of COVID-19 on home working will have meant some households saw no other option than to move, even if they thought overall home buying conditions were unfavourable. That short term impact has coincided with building demographic pressures, as a bulge of Americans in their late-20s and early 30s look to leave the rental sector and buy a home.
  • Accordingly, we doubt the latest fall in home buying sentiment is signalling an imminent crash in home sales. After all, with inventory at record lows, plenty of those who need to buy a home have not been able to do so, which will support demand over the next few months. That said, it is also true that home buying sentiment has been a better leading indicator of sales than buying intentions. That supports our call for a gradual moderation in existing home sales to around 5.7m annualised by the end of the year.

Chart 1: Good Time to Buy & Existing Home Sales

Chart 2: Buying Sentiment & Plans (%, 3-Mth Avg.)

Sources: Refinitiv, NAR, Uni. Of. Mich.

Sources: Refinitiv, Uni. Of Mich., Conf. Board


Matthew Pointon, Senior Property Economist, matthew.pointon@capitaleconomics.com