Everyone Knows the Housing Market Craziness Can’t Last, then the First Dip Turns into a Big Drop | Wolf Street

Home prices skyrocketed by the double digits starting last summer, despite the loss of 10 million jobs still, and with 2.5 million mortgages still in forbearance, as mortgage rates dropped from historic low to historic low. People bought homes without putting their old and now vacant home on the market because it’s profitable to hold it, amid surging home prices and low interest rates and the possibility of yanking cash out of the old house via a refi. As homes got grabbed and sales surged, other homes weren’t put on the market, inventory for sale plunged, and prices surged. But now, sales have turned from a preliminary dip late last year to a big drop in February. And everyone is wondering why.

In February, sales of existing homes  – single-family houses, condos, and co-ops –  dropped by 6.6% from January to a seasonally adjusted annual rate of 6.22 million homes, the National Association of Realtors reported today. On a year-over-year basis, sales in September through January had been up in a range from 19% to 24.4%. In February, the year-over-year increase was down to 9.1% (data via YCharts):

The shadow inventory: Empowered by low mortgage rates and surging home prices, people who buy a home feel no urge to sell the old home. They can just hold the vacant home and profit from the current price increases that far outrun the carrying costs. In addition, they can refinance the mortgage and take cash out of the vacant home, while speculating on further price increases. I personally know several people who have done this as part of their financial calculus.

Mortgages in forbearance are still a big factor. According to the Mortgage Bankers’ Association, 2.5 million mortgages, or 5.1% of all mortgages, are still in forbearance, meaning that lenders have agreed not to execute their right to foreclose, thus allowing the borrower to skip mortgage payments. Many of these mortgages were already delinquent when they entered forbearance.

Everyone Knows the Housing Market Craziness Can’t Last, then the First Dip Turns into a Big Drop | Wolf Street