Where Are We Going?

Housing Taking the Brunt of Inflation Fight

By: Charles C. Shinn Jr., PhD
President, Builder Partnerships

The housing industry is taking the brunt of the Fed’s battle to fight a very stubborn Inflation rate that the U.S. has not experienced in 40 years. During 2022, the FOMC raised the Fed funds rate seven times for a total of 425 bps. It is expected to raise the Fed funds rate two more times during the first quarter of this year with a 50 bp increase in February and a 25 bp increase in March. Economists are forecasting that the economy will go into a recession during the second or third quarter of this year, just in time for home selling season.

The housing industry is already in a recession. Home buyer traffic has disappeared, contract cancellations have doubled, and home sales are down 20% to 50%. The rapid rise in mortgage interest rates and home prices has created sticker shock and an affordability problem. Currently, the 30-year fixed mortgage interest rate is 6.5%, which is almost double the rate a year ago. On November 10 the rate hit 7.2%. This mortgage interest rate increase on a $400,000 mortgage has increased the monthly payment by approximately $750, and sales prices during the last year have increased more than 1.0% per month.

The pending home sales index is a two-month leading indicator for existing home sales activity. It is based on signed sales contracts which typically occur two to three months before the closing of the sales contract which is recorded as an existing home sale. The index in November registered its second-lowest monthly reading in 20 years, surpassed only by the month of the COVID shutdown. During the last year, the index has consistently declined and is now standing at 37.8% below last November.

In November, existing home sales marked 10 consecutive months of decline, dropping to a 4.09 million seasonally adjusted annual rate. November sales registered a 35.4% drop from November 2021. All four regions had double-digit declines with the West showing the biggest decline of 45.7%, followed by the South with a 35.0% drop in sales. The rapid increase in home prices and the sharp rise in mortgage rates have impacted housing demand with reduced affordability. Over the last five months, the median sales price has dropped 10.4% from $413,800 in June to $370.700 in November. The inventory of existing homes for sale remains tight with only 3.3 months of supply. Typically, a home is only on the market for 24 days with 61% of homes sold in less than a month.

Total housing permits dropped 11.2% from October, and 22.4% since last November. Single family permits declined 7.1% from October and 29.7% from the activity rate last year. Multifamily permits decreased 16.4% from October, however, the rate was 12.9% above what was recorded last November. To date, 2022 building permits are down 2.4%, with single family permits behind 10.8% and multifamily ahead 11.3% over the pace recorded in 2021.

Total housing starts were down 16.4% from last year, while single family starts recorded a 32.1% decline, and multifamily starts increased 17.9%. So far this year, total starts are behind last year by 2.4%. Single family starts are down 10.8% while the multifamily starts to date are ahead of last year by 11.3%

New home sales saw an increase in November of 5.8% over October, due to reductions in interest rates and the fact that builders were incentivizing sales with closing costs, interest rate buy downs, and price reductions. Even with the incentives, the November rate of new home sales was down 15.3% from the rate last year. To date, the 2022 sales pace is off 15.2% from last year, with the Midwest recording the biggest drop at 22.3%, followed by the West at 19.3%, and the all-important Southern region down 13.1%. There was a drawdown in for-sale inventory in November, but it was still 18.2% above last year with an 8.6 month of supply. The supply of inventory peaked in July at 10.0 months of supply. The median sales price in November dropped 2.8% to $471,200.

From my discussions with my builder groups, December had good sales, and it appears that sales in January will be better than November and December. They are still expecting sales to be down 20% to 30% this year. Builders are offering a number of incentives totaling 5% to 12% of sales price. Their main concern right now is maintaining their backlog, with contract cancellations doubling in the last several months. If they are carrying excess spec inventory, they are willing to drop the price to breakeven to unload, eliminating carrying costs and freeing up their lines of credit. Some of the builders are already in their second round of staff reductions while others are looking at maintaining their staff to retool their product lines and company operating systems which were stretched during the last couple of years. Several of the builders are looking at build-to-rent projects to fill the sales void to keep their staff and trades together during this downturn. Land deals have become available, but it is still too early in the cycle. Land deals typically are best at the end of the down cycle.

Data Updated: January 27, 2023
(December 2022 Data)

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