Where Are We Going?

Troubled Waters for Housing on the Horizon

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

For the last several months, I have been warning builders to be very cautious about the second half of this year. For the last two years, it has been a seller’s market with very little new and existing housing inventory, and very strong demand, allowing median home prices to escalate in the last year by 19.6% ($450,600) for new homes and 14.8% ($391,200) for existing homes. The favorable environment for housing is currently changing very rapidly.

The FED has finally acknowledged that the 8.5% inflation and the 11.0% increase in producer prices are not transitory and must be countered with tighter monetary policies. Over the last two months, FOMC has raised the federal funds rate by 75 bps (25bps in March and 50bps in April). Additionally, it plans to begin shrinking the FED’s balance sheet with caps on Treasury securities and mortgage-backed securities. It is expected that there will be at least another 50bps increase in June and a 25bps to (more likely) 50bps hike in July.

Mortgage interest rates have responded very rapidly to the FED’s actions. During 2021, the average interest rate for a 30-year fixed rate mortgage was 2.96% according to Freddie Mac. In April, the average rate had increased 68.21% to 4.98%. As of May 19, the rate had risen to 5.25%. We are starting to see a slowdown in home buyer traffic, and many builders are experiencing contract cancellations because of financial disqualifications.

The housing industry is going to be in a very difficult period during at least the rest of this year as the FED tries to gain control of inflation. It reminds me of the Jimmy Carter era when Paul Volcker had to stem runaway inflation. Builders need to prepare for troubled waters on the horizon.

In April, total starts were down only 0.2% from April because of the 15.3% surge in multifamily starts. Single family starts dropped 7.3%. Both the total starts figures for February and March were revised down from earlier estimates. As of the end of April, total starts are up 10.4% from last year with single family starts up only 4.1% and multifamily starts up 26.3%.

Existing home sales have fallen for three straight months, dropping below $6 million to $5.61 million. April sales were down 5.9% from last year. Slower demand created an increase in unsold existing homes which generated 2.2 months of supply. The median existing home sales price in April was $391,200 which represented a 14.8% increase over last April, and 122 consecutive months of year-over-year increases which is the longest streak on record.

New home sales dropped 16.6% from March to April which also represented a plunge of 26.9% from the sales pace in April 2021. This is the fourth straight month of decline and the second month of double-digit reduction. The drop in the sales rate was experienced in all regions, with the South region hit the hardest, with a monthly drop of 19.8% and a year-over-year drop of 36.6%. The April contraction is the sharpest monthly drop in sales since July 2013. April new home sales are down 13.3% from the same period last year. The only region experiencing any growth is the Northeast (which is the smallest region). The South (which is the largest region) had a drop of 19.3% in sales.

New home inventories expanded by 8.3% monthly and 40.1% since last year. There are now nine months of supply of new home inventory. However, only 8.5% of the inventory is completed and ready to be sold. A high percentage (64.9%) of the inventory is under construction, and another 26.6% of the inventory has yet to be started.

The median sales price for April sales was $450,600 which represents a 19.6% increase since last year. The rapid rise in new home sales prices and mortgage interest rates are having both a financial and psychological impact on home buyers. Builders need to be prepared for a much slower and difficult time for the rest of the year.

Data Updated: October 31, 2022
(September 2022 Data)

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