In December 2018, existing home sales plunged to 4.99M, a -10.3% drop from December 2017. This was the steepest decline in existing home sales in 7 years on top of y/y declines of -7.8% in November 2018 and -5.1% in October 2018, according to the National Association of REALTORS®.

Existing home sales dropped in every region of the country, at every price point and in every month of 2018 save February.

Not only did agents and brokers feel these steep declines, lenders were also hurting in Q4 2018. Wells Fargo’s mortgage banking income fell by a whopping -50% to $467M and mortgage originations fell by -28% to $438B. JP Morgan’s mortgage banking income dropped to $203M, a -46% decline from Q4 2017. And mortgage originations fell by -30% to $17.2B.

Wall Street investors and analysts saw red flags flying high over the housing industry in December. A UBS economic report indicated, “The deterioration in housing and its intensification since midyear raise the possibility of an underlying weakness in the household sector.” Because housing declines have foreshadowed 9 of the 11 post WWII recessions in the US, the UBS report also noted, “The housing market usually does not slowdown in a vacuum and, a falling housing market may well be the first indication of broader economic weakness.”

So what’s going on within the housing sector in the midst of a strong economy, strong wage growth, low unemployment and low delinquency rates?

UBS analysts believe that rising interest rates account for one half of the slowdown in housing sales. With four interest rate hikes in 2018, the 30-year mortgage rate hit 4.9% in November 2018, the highest mark since 2011, and then fell to 4.45% in December.

Daryl Fairweather, chief economist with Redfin told Business Insider, “We saw this cool-down because buyers couldn’t afford these homes anymore,” after seeing the 82nd straight month of y/y gains in home prices.

Judy Shenn, vice president in structured finance with Moody’s, pointed to the 70M Millennials being cash strapped and unable to purchase a home. “They need to be in the housing market to keep things going but they face real affordability challenges. Just being able to get a home they can afford on a monthly basis with a mortgage is on the challenging side at this point.”

Other experts cite rising construction costs, the reduction of mortgage deductions in the new tax law, tightening credit standards by some lenders and less flexibility in underwriting. According to the Federal Reserve Bank of New York’s latest Credit Access Survey, “The rate of rejections of mortgage and refinancing applications dropped to 6.7% from 9.2% in the second half of the year and overall rejections increased to 19% from 15.6%,, the highest mark since February 2015. “

Joint research by Fannie Mae and the University of Michigan found that consumer sentiment about “it being a good time to buy” has been falling since 2014 and that “it being a good time to sell” was higher than “a good time to buy” in December.

Though expert consensus is less than optimistic, UBS muses that the atmosphere in the housing market is “…not eminently dangerous…” but that “…the incongruity of not spending on housing within the rest of the economy is a red flag. The unwillingness to spend on large, long-lasting items like housing may signal a susceptibility of consumer confidence and spending that is adverse to stocks.”