In 2019, The New York Times set the Internet ablaze with a blistering, zero-star review of Brooklyn’s famed Peter Luger Steak House. The title: “Peter Luger Used to Sizzle, Now It Sputters.” Open since 1887, Peter Luger is the third-oldest steakhouse in New York City, famous for its porterhouse served on a scalding hot plate for two to four people. The review created intense discourse online, with fans of the restaurant deriding it as smug, while others chimed in that they never understood the steakhouse’s hype. True to their Brooklyn bona fides, Peter Luger’s owners responded with a sly dig, proclaiming that: “We know who we are and have always been. The best steak you can eat. Not the latest kale salad.” Luckily for Peter Luger, the zero-star review didn’t turn many customers away (if anything, it created more intrigue). To this day, it’s a prized reservation and packed full with red meat lovers, night after night.
The Times’ turn-of-phrase about Peter Luger aptly describes the U.S. housing market in the post-pandemic era. Housing “used to sizzle” in the initial aftermath of the COVID shutdown, driven by 1) city-dwellers flocking to the exurbs, 2) remote work allowing people to migrate, 3) historically low mortgage rates, and 4) the Federal Reserve intervening via the purchase of trillions in mortgage-backed securities. Home prices soared and so did buyer traffic. On a year-over-year (YoY) basis, the Mortgage Bankers Association’s Average Home Purchase Loan Size peaked at 27.5% in April 2021 (fuchsia line). A few months prior, the NAHB’s Buyer Traffic gauge peaked at a record-high 77 in November 2020 and held north of 60 for another 18 months (aqua line).
With the arrival of Fed tightening in 2022, and mortgage rates ascending north of 6%, housing activity began to sputter, which it has done since. The average home purchase loan size was down 3.1% YoY in the week ended October 10th, a two-year low save for the prior week’s -3.3%. And while 30-year mortgage rates have dipped to their lowest since last October, Buyer Traffic remains at stall speed. The NAHB gauge did jump four points to 25 in October, but this only marks a round-trip back to April levels. Furthermore, while not pictured, history back to 1985 shows the only other times Buyer Traffic has crossed below the 25-line were the 1990-91 downturn and the mid-2000s housing bust.
The MBA noted in its latest release that, “despite more inventory, builder incentives, and lower mortgage rates, near-term demand is slowing as the labor market weakens.” A channel check via Sherwin-Williams’ (S-W) stock price: On a YoY basis, the paint maker’s stock has been in the red for four months running and appears to be charting the same path into negativity that it tread in 2022 when the Fed began hiking rates (pink line). September’s 9.3% YoY decline was the worst performance in several years, and the current -7.6% level isn’t much better. S-W’s latest earnings release, from July, missed expectations and cut full-year guidance. The stock price deterioration goes hand in hand with softening in University of Michigan Home Selling Conditions (purple line). Despite a five-point increase in October’s preliminary data to 102, Selling Conditions have been on a downward trajectory since 2022. Meanwhile, Buying Conditions, at 38, remain subdued, in line with their average since January 2023 (yellow line).
Last Thursday, Redfin published its latest housing assessment, which captured the lay of the land: “New Listings Creep Up as Would-Be Homebuyers Back Off, Haunted by High Prices and Economic Unease”. In the four weeks ended October 12th, new listings were up 4.1% YoY, the largest increase in four months, while months’ supply had ticked up three-tenths to a “balanced” 4.5 months. As inventories have risen and buyer activity remains tepid, time spent on market has ticked up in train. At 48, the current median number of days is roughly a week longer than what it was this time last year (green line, bottom left chart). Moreover, the median time on the market has been longer at every point this year than at the same points in 2022, 2023, or 2024.
Similarly, the share of homes selling above list price is running below levels from the past three years. The current 23.2% is a marked decline from last year’s 26% (green line, bottom right chart). In turn, more sellers are either accepting a below-asking offer or cutting the list price altogether. In August, Redfin tallied that the typical home sold was 3.8% below asking, the biggest discount for August since 2019. Furthermore, one-in-six home sellers had dropped their asking price in August, the highest share since 2012. In some of the metro areas that saw the biggest pandemic booms, that rate was more than 25% (Denver, San Antonio, Austin, Dallas, Houston, Tampa, Jacksonville, and Fort Worth).
One last note from Redfin that sounded the alarm: 15.1% of home-purchase agreements were cancelled by buyers in August, the highest for that month in records to 2017. When asked why deals fell through, surveyed Redfin agents most commonly cited inspection issues (70.4%). However, the other most common reasons included: buyer financing falling through (27.8%), buyer unable to sell current home (21%), change in buyer’s financial situation (14.9%), and economic concerns (12.2%). Amidst the economic uncertainty, QI friend and housing guru Melody Wright warned that she anticipates foreclosures will keep rising. Last week’s crypto drawdown likely didn’t help either for homeowners over-exposed to speculative investments. Per Melody: “Social media is currently awash with tales, including tragic ones, of those who were liquidated…those individuals will have to make unpleasant choices which could mean selling their home, moving back in with parents, [or] getting a roommate.” If only a Peter Luger porterhouse was enough to remedy their woes.