“Four score and seven years ago our fathers brought forth, upon this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.”
–President Abraham Lincoln, November 19, 1863
No one counts that way anymore. But eight score and one year ago today, President Abraham Lincoln elevated “score” as a famed word of counting. Anyone who has visited Washington, D.C. can attest as it’s engraved on the south wall of the Lincoln Memorial. The word score, in the sense of meaning 20, is derived from the Old Norse word skor, from the practice of counting sheep, cattle and other livestock by making a notch called a score on a stick before proceeding to count the next 20. It first appeared in print in English around the year 1400, in The Romaunt of the Rose, a partial translation into Middle English of the French allegorical poem Le Roman de la Rose by the legendary Geoffrey Chaucer.
Two score minus one year ago, in 1985, the National Association of Home Builders (NAHB) debuted its Housing Market Index (HMI) to keep score in the single-family home market. It was originally constructed to predict housing booms and busts, an achievement it can claim. Its inaugural HMI in January of that year showed a reading of 50. It remained in a narrow band between 50 and 64 until the late 1980s, when distress manifested in the survey emanating from the Savings & Loan Crisis.
It’s important to note that this is a survey of home builders, whose DNA makeup is innately optimistic. Hence, its three components – Present Sales, Future Sales and Prospective Buyer Traffic – naturally reveal varying degrees of observation and hope. This disclaimed, it was notable that November’s NAHB divulged the widest dispersion on record between Future Sales and Prospective Buyer Traffic. The former vaulted to a reading of 64 as election uncertainty vanished. Meanwhile, the latter posted a below-normal reading of 32, which compares to its long-run average of 40. The 32-point record spread scaled to a +1.6 z-score. Builders have the future priced to perfection (light blue line).
To demonstrate the flaw in a metric that projects single-family sales prospects in the next six months (yellow line), we plotted it against real-time mortgage application volume for home purchases (fuchsia line). Note that the two historically move concurrently. This year, a clear divergence has developed. Using January as the anchor month, expectations have risen from 57 to their current 2 ½-year high. Purchase activity is running counter to these good vibes – on a monthly average basis, it’s fallen from its January 2024 apex of 159.9 in January to 132.1 through November’s first two weeks, the second-lowest average in this cycle and the lowest since 1995.
Builders’ optimism is apt to continue being thwarted. Yesterday’s New York Federal Reserve Credit Access Survey found “reported rejection rates for credit cards, mortgages, auto loans, credit card limit extension applications, and mortgage loan refinance applications all rose in 2024.” Isolating mortgages, the rejection rate over the last 12 months rose to 22.6% from 17.2% in June (purple line), a nine-year high and materially higher than the long-run average of 14%.
Homeowners’ ability to tap their home equity is even more impaired. The home mortgage rejection rate in the next 12 months increased to 44.0% in October from 39.6% in June (orange line). Framing its long-run average of 37% since the 2013 survey inception is key in the current environment given the 40%-level has only been breached in four of the last five reports. In the ten years prior to the current run, we only saw one reading north of this threshold, in February 2017.
At the lower rungs of the income distribution, the battle to secure housing hits home hard, a subject that clearly resonated in the recent election. According to a Redfin story published yesterday, nearly three-quarters of U.S. residents who earn less than $50,000 a year struggle to afford their regular mortgage or rent payments. Here is Redfin with our bolding: “Of those people, nearly one-quarter (24%) report they have skipped meals to afford their monthly housing costs… one of the most commonly cited sacrifices…topped only by eating at restaurants less often (43%), taking no or fewer vacations (36%) and borrowing money from family or friends (25%).” In addition, nearly one-quarter (23%) sold belongings to afford housing payments and just over one in five (21%) have delayed or skipped medical treatments.
As we look ahead to Thursday’s October existing home sales report, the consensus has penciled in a 3% monthly advance to a 3.95 million seasonally adjusted annual rate from September’s 3.84 pace. This seems reasonable given the National Association of Realtor’s pending home sales index rose by a stout 7.4% in September. Redfin’s October single-family homes sales corroborated, posting a 1.7% rise (red line).
Forward guidance from households suggests the bounce could be short-lived, validated by the University of Michigan’s (UMich) home buying and home selling conditions. Fusing these two gauges into a composite average indicates a fall back in November to 74.0 from October’s five-month high of 77.0 (blue line). UMich’s depressed guidance under the 80 threshold is comparable to only one other economic period that occurred less than two score ago. Unlike the Gettysburg Address, it suggests the last word on the ‘Home Sales Slump of the 2020s’ has yet to be written.