Much has been made of recent mortgage rate increases with headlines about plunging U.S. home sales – but how low, realistically, can home sales go? Here’s what that bottom may look like, based on a Black Knight analysis of historical data.
While it’s true the market is facing strong economic headwinds, demand for homes never seems to drop all the way to zero. In a recent blog we suggested sales are likely to dip 15% to 20% in the last half of 2022. That is consistent with previous market responses to mortgage rate increases. But what drives that number?
As it turns out, there are several non-financial factors, many of them event-triggered, that create a floor under the market and continue to drive home sales through good times and bad. Some of those factors include:
- Job moves
We’ll look at each, in turn.
Marriages can affect the home sales market in a couple of ways. Whereas a young couple starting out might be in the market to buy a house, a more established couple, where both partners already own homes, might put one or both on the market as they combine assets for their new life together.
Let’s assume 30% of marriages – using last year’s 1.7 million marriages in the U.S. as an estimate – result in a listing, that’s 510K homes added to the for-sale inventory. Factor in the results of a Coldwell Banker study that found 35% of newlyweds buy a home within their first two years of marriage, and that’s 300K purchases a year.
Any way you slice it, marriage is a big non-financial driver on both sides of the single-family home sales equation.
Divorces can also result in home sales, although there isn’t as much data available to help us quantify how many. According to smartagents.com, 61% of the 1.2M divorces in the U.S. each year result in a home sale. That’s 732K homes added to the for-sale home inventory.
Death claimed 3.4M Americans in 2021. Assuming a 75% home ownership rate (76.6% is the ownership rate for those 75 years in age and up, 78.9% for those 65-74 years in age according to the U.S. Census) and an average household size of 1.75 for seniors (again based on the U.S. Census), that’s almost 1.5 million houses vacated annually due to death. Assuming 10% are retained by heirs and held as rentals (a recent trend and conservatively high percentage based on past data), that’s 1.31 million homes likely to hit the market.
Job Moves are the most common reason for selling a home, according to National Human Resources Association member data. According to Movebuddha.com the average American moves 11.7 times in their lifetime and 4.8M Americans made interstate moves in 2021. U.S. Census data shows nearly half of new jobs in 2021 resulted in a move, but this was during a time of lower interest rates and a vigorous market. Going forward, with the work-from-home trend, we assume only 35% of the normal 2M net new jobs will require relocation, and that 40% of the movers will be renters. All things considered, we estimate job moves will add 420K homes for sale in any given year, with an equivalent number of purchases on the other end.
Births/Household Expansion creates a need for more space. In the U.S. we are averaging about 3.8 million births per year and while many parents have sufficient space for children, there will be some who need to buy larger homes to accommodate their arrival. Some of these households are renters, and some will be trading up from starter homes, so let’s assume 250K net new home purchases, a very conservative figure.
Foreclosures tend to be higher during recessions and when we observe increases in unemployment. While foreclosures have been running under 0.15% in recent years, due largely to a pandemic-related federal moratorium, the foreclosure rate has been known to exceed 2% during a significant recession. Conservatively we expect to see at least 170K foreclosure sales per year during a strong economy and up to several times that in a weak economy. With mortgage rates now climbing and home prices falling in some markets, we may expect to see higher foreclosure rates in the last half of 2023, possibly well above the 150K mark assumed here for the long run.
There are lots of other factors we could consider and any number of mitigating factors we could use to temper our assumptions, but the bottom line, based on our analysis of historical trends, is that we see a floor of 3 million home sales per year – a number that represents annual sales the market could expect, even in a deep recession.
It is important to note our figure is conservatively low. Normal annual home sales volumes have been running well over 4M for many years, and closer to 6M for the last few years. This excludes new home sales, and so our likely sales volumes for existing homes in 2023 and beyond should run somewhere north of 4M.
Minimum Sales Using Historical Trends and US Households
Let’s check those numbers with aggregate data. Looking at historical sales trends relative to the number of U.S. households (Exhibit 1) yields a higher minimum sales figure, above 5M, going forward. The solid, somewhat straight, line represents the U.S. household trend and the more erratic housing sales line is clearly correlated.
Exhibit 1: U.S. Household Estimates and Existing Housing Sales By Year (000)s
Minimum Sales Using Historical Turnover Rates and Housing Inventory
Yet another approach would be to look at minimum turnover or sales as a percent of households, independent of whether they rent of own. For the U.S. as a whole and considering only existing housing sales, we plot this going back to 1968 in Exhibit 2. This gives us a minimum of around 2.5% of households, with 4% being closer to the average. It should be noted that sales ran at this percentage or somewhat higher in the 1981-82 period when mortgage rates were between 16% and 18% and in the aftermath of the Great Recession of 2007-2008. At 2.5% times 130M households we get 3.25M sales, which seems the most conservative estimate of annual minimum existing housing sales. Again, this could only occur if we entered a deep recession. At 4%, we get 5.2M in sales. This is closer to what is likely over the next 12 months assuming mortgage rates soften some from their 7% plus rates. If mortgage rates stay at 7% throughout 2023, we could witness sales volumes in the 4M to 4.5M range.
Exhibit 2: US Existing Housing Sales as a Percentage of Households Since 1968
Exhibit 3 below applies this metric to several top U.S. housing sales markets. Note that some markets with high turnover and volatility – such as Las Vegas, Phoenix and Miami – tend to run above the U.S. average. Other markets – such as San Francisco, Los Angeles and San Diego – run below. These markets are all based in California and are all inhibited by Proposition 13, which assesses higher property taxes when one sells an appreciated home and buys another home.
Exhibit 3: US Existing Housing Sales as a Percentage of Households Since 1981 By CBSA
Our analysis suggests that while home sales may drop precipitously in the months ahead, and have already begun to drop, they won’t drop to zero. Sales dipping by 15% to 25% would be more in line with historical reactions to a period of significantly higher mortgage rates. Strong employment gains have continued through August of 2022, adding to the expected minimum sales. Rather than view this possible decline as a negative or huge fall off, we prefer to characterize it as a return to a more normal market condition – although we do not foresee more typical levels of available inventory for sale in the housing market anytime soon.