• The share of U.S. homes seeing a price drop has been on the rise.
  • Despite short supply, sellers are being forced to lower prices.
  • Higher mortgage rates and weak economic growth will hurt the market’s momentum.

The U.S. housing market gave out a positive sign earlier this week when it emerged that starts for the month of October improved sharply.

There was a nice bump in key housing metrics – starts, building permits, and even completions – indicating that the market continues to remain in great health despite tepid economic growth and slow wage increments. But a closer look at the inner developments indicates that all is not well with the U.S. housing market.

A big problem with the U.S. housing market

According to data from real estate brokerage firm Redfin, there has been a consistent jump in the proportion of sellers who have reduced the price of their homes to attract buyers.

Share of home price drops
Share of homes with price drops in the U.S. has been on the rise this year. | Source: Redfin

In December 2018, there were just 15.6% of homes with price drops. Cut to October 2019 and the share of homes with a price drop has nearly doubled to 29.1%. This is an indication that the U.S. housing market might be cooling off.

That’s because sellers have been forced to reduce prices despite a shortage of home supply. Redfin data indicates that the supply of homes on the market has dropped from 4.5 months back in January this year to just three months in October. This is a clear indication that sellers are finding it difficult to attract buyers and are reducing prices in a bid to move inventory.

Home supply chart
The supply of homes has been dwindling in the U.S. housing market. | Source: Redfin

Not surprisingly, the sales price of new homes in the U.S. was down 1.5% annually to a median level of $370,300 in the third quarter of the year. Redfin reports that this was the third consecutive quarter of median price decline of new homes, and was the biggest drop seen in the past seven years.

The price drop has taken place despite the fact that the supply of new homes was down 7.9% annually in the third quarter. Again, this was the second consecutive quarter of lower inventories and the biggest fall in inventory witnessed in the past seven years.

Clearly, builders are making homes more affordable for buyers despite low supply. This is a red flag for the U.S. housing market as pricing trends could head lower thanks to a couple of factors.

Two points to worry about

The U.S. housing market has been propped up by low mortgage rates so far. But the bad news is that mortgage rates have started climbing of late.

Mortgage rates are still well below where they were last year. But market bulls have reason to worry as weak economic growth in the country could force buyers to become stingy. According to the Federal Reserve Bank of Philadelphia, U.S. GDP growth for the current quarter is expected at 1.7% as compared to the prior forecast of 2%.

The Philadelphia Fed’s survey of 39 economists also throws up some warning signs for 2020. It is now estimated that the U.S. economy would grow at just 1.8% next year after this year’s 2.3% growth. Meanwhile, the minutes of the latest FOMC meeting suggest that the Fed might be done cutting interest rates.

If that’s indeed the case, the U.S. housing market could lose the low mortgage rate tailwind. And when coupled with a slowing economy, there’s a chance that sellers will have to keep lowering prices in a bid to move inventories.