In a development that should surprise exactly no one, homebuilder sentiment plunged this month to the lowest in more than two years, as sharply higher mortgage rates and elevated inflation curtailed buyer traffic and sales.
The NAHB gauge suffered an egregious MoM drop, pushing the index to 55, lower than every estimate and the worst reading since the prints around the anomalous dive that accompanied the onset of the pandemic.
In a sign of the times, the official press release used the word “plunged.” So, don’t blame me if you’re allergic to ostensible hyperbole. The same release described the decrease in buyer activity as “dramatic.” The US housing market, NAHB said, has “stalled.”
As the figure (above) shows, the monthly drop was the seventh consecutive and the size of the decline suggested “angst” may be insufficient to convey the prevailing psychology.
Anecdotes from a builder in Savannah were particularly colorful. Between pervasive bottlenecks, the onerous cost of construction and land prices, “many builders” are discovering that, inclusive of financing, the all-in cost “exceeds the market value of the home.” The percentage of survey participants who said they’ve cut prices over the past 30 days in an effort to support sales is in the double-digits.
A forward looking gauge of single-family sales dropped to 50 (figure below).
Outside of the pandemic months, you have to travel back to 2012 to find a comparable print on the “single-family, next six months” gauge. For context, it reached a listless nadir of 15 in early 2009.
I’ve said repeatedly that demographics and scarce supply won’t be enough to support the market with mortgage rates doubling in such a compressed timeframe and prices still perched near records. Critics of that view ignore the simplest, most tautological reality of all: People can’t buy what they can’t buy. It doesn’t matter how badly they might want it, whatever “it” happens to be. If enough people are similarly situated, a dearth of supply becomes irrelevant.
While we’re not staring at any kind of “end game” (so to speak) just yet, that thesis of mine is, in fact, unfolding right now, in real time. “Affordability is the greatest challenge facing the housing market,” NAHB Chief Economist Robert Dietz said Monday, adding that “significant segments of the home-buying population are priced out of the market.”
If you’re inclined to suggest investor demand will be sufficient to keep prices elevated, you may be disappointed on that front too. According to sources who spoke to Bloomberg, some of the country’s biggest investors have “cut buying activity by more than 50%” amid uncertainty about the trajectory of prices.
Still, Patrick Clark wrote, “industry executives say the recent slowdown has not dampened their enthusiasm for single-family rentals, and many expect the housing market to offer better opportunities in the months ahead… in the form of lower home prices, rising rents or an increased willingness by homebuilders to sell properties in bulk.”
I can say with personal experience that the market dynamics have changed in housing. On a go forward basis, housing will not be a source of inflation- it may take time for that to be reflected in price indexes as OER and rental rates will lag this correction. A kind outcome here would be a period of 2-5 years of flattish prices. That is my base case, assuming we don’t get a major recession or a further spike in mortgage rates. Demographics and supply shortages in many places will prevent a collapse of prices but there is likely some correction coming especially in many of the previously hot markets.
I looked at some charts of SFH investor by type, and was surprised to see how large a percent of the purchases have been by small investors, who are hit by mortgage rates like ordinary homebuyers. I think the big institutional buyers, spending previously-raised investor capital, should be less affected by rising cost of capital and able to take advantage of house price declines.
Really important topic. I believe Americans want to hear about affordability in every area of their lives. To me, this is reminiscent of the Ross Perot pitch of 1992. (Before he got kidnapped by aliens.)