Homebuilder sentiment dropped again in November, data released on Wednesday showed.
It was the 11th consecutive monthly decline. Put differently, builder sentiment has deteriorated every month this year.
At 33, the index was the lowest since April of 2020 (figure below), and before that, June of 2012. Consensus expected 36. The range, from three-dozen economists, was 32 to 28.
The NAHB refers to this as a “housing recession.” Chairman Jerry Konter, who’s also a builder and developer from Savannah, reiterated the point on Wednesday. “With the housing sector in a recession, the Biden administration and new Congress must turn their focus to policies that lower the cost of building and allow the nation’s home builders to expand housing production.”
At regular intervals, I come back to the same general assessment, as expounded most recently in “US Housing Bubble — Something’s Gotta Give.” The market is staring at a kind of impossible trinity. You can’t have prohibitively high prices, prohibitively high financing costs and prohibitively high building costs. In that scenario, nobody wants to buy (it’s not affordable), nobody wants to sell (because unless you’re paying cash for your new home, you’re trading a rock-bottom mortgage rate for a very high one) and nobody wants to build (because input costs are high and margins are crimped by the necessity of offering incentives to lure reluctant buyers).
That isn’t tenable. If it persists, the housing market will freeze up, and residential investment will continue to exert meaningful drag on GDP. If personal consumption falters and business investment weakens in the face of slowing demand, you’ll have a recession. The familiar figure (below) just shows the longer history of the NAHB gauge with single-family starts.
Current readings on the NAHB gauge are well on their way to those seen in the wake of the subprime bust.
Too many observers continue to lean on the notion that demographics and scarce supply will keep prices buoyant. That may be true, but on the buyer side, remember that just because you need something (in this case a roof over your family’s head) doesn’t thereby mean you’ll get it. In America, it’s illegal to simply take what you need for your family. Rather, you have to pay, in money, and if the price is too high, you don’t get that roof, or that tank of gas or that loaf of bread.
Konter on Wednesday described buyer traffic as “increasingly scarce.” So, no, people aren’t just going to keep buying because people like houses and the demographics are favorable. Consider this: The demographics are very favorable for food. Everyone needs it, and if you don’t get enough of it, you’ll eventually die. But people suffer from food insecurity all over the country, every single day.
When it comes to homes, buying requires a sum of money up front (some percentage of the purchase price) and financing whatever’s left over, with the monthly payments determined both by how much was paid up front and what the cost of financing the rest is. When the purchase price is very high, yesteryear’s 20% downpayment is today’s 10% downpayment, which means monthly payments would be higher even if rates where still low, which they aren’t. Middle-income Americans are financing a larger amount, at a higher cost and because a 20% downpayment is less doable, many borrowers will probably need PMI, which only increases the all-in monthly cost. And then there’s insurance, taxes and HOA fees (depending on where you live) and so on.
It’s just not going to work for many people, something NAHB Chief Economist Robert Dietz tried (in vain, probably) to convey Wednesday. “To ease the worsening housing affordability crisis, policymakers must seek solutions that create more affordable and attainable housing,” he said. “With inflation showing signs of moderating, this includes a reduction in the pace of the Fed’s rate hikes and reducing regulatory costs associated with land development and home construction.”
You can call that self-serving if you like, but… well, again, people are going to stop buying homes in America. And if, as Dietz also suggested, building costs, labor and materials remain elevated for builders, people are going to stop building them too. That, in turn, will prop up prices for what homes there still are, perpetuating the affordability crisis, and compelling builders who do build to offer incentives that offset the high prices. It’s circular. And things that are circular are typically absurd. This is no exception.
59% of builders reported using incentives in November to attract buyers. The percentage of builders buying down rates nearly doubled from September. 37% of builders cut prices this month, compared to 26% two months ago. The average price reduction was 6%.
That figure (the 6% figure) is nowhere near the average during the financial crisis, when double-digit price cuts were common. But give it a few months. If you’re a builder (or a seller in general) and paying the points doesn’t work, the only way you’re going to entice buyers is to offer them a cheaper house or, more to the point, a house they can afford. It’s either that, or mortgage rates fall.
I’m not sure how much clearer this can be.
Home price appreciation has vastly outpaced wage gains for, what, forty years? The only real solution to the problem is lower home prices.
Wish you could say that about private education in the UK!
I sit here as the last person to close on a home sale in 2022. Feeling like new money, paying a high rent patiently waiting for the looming drop in prices / rates.
True, but that’s not an easy place to get to–costs of materials are high, cost of labor is high, costs of permits are high, zoning laws are increasingly restrictive, and rates are high. Honestly don’t see any of that changing
Replying to mfn
Are new buyers using ARMs to counteract the huge rise in fixed rate financing?
That’s at least a temporary solution, albeit risky, to one of the triads (high prices, high financing, lack of supply) of which you were writing.
At this point, better to play the odds with an ARM than lock in 7% for 30 years. 7% will do enough damage to the housing market as it is without thinking about the implication of what 8% or 9% will do. Regardless, new buyers are virtually non-existent at this point due to the aforementioned dynamics above. No one wants anything to do with an ARM or 7% mortgage rates.
I still think 5% is the threshold where you’ll see the dynamics flip back toward more demand than supply. At the end of the day though, it does boil down to needing a national housing policy. Whether it’s high prices or financing costs, the only way to get the market to function is what the homebuilders want: lower the cost to build. Leaning on the Fed to bring down prices doesn’t do much other than cause the prices to drop.
The coming months/year will be a golden opportunity for cash rich investors to buy up residential real estate before rates go down and supply dries up. Before you know it, residential real estate will look like the ag real estate sector: increasingly dominated by fewer, larger landowners and investors.
I can answer this question from my own personal perspective. I just closed on a property yesterday using a 10-year ARM. My logic was that no matter what, I will have to refinance my loan sometime in the next ten years, so I might as well take advantage of a lower interest rate between now and whenever I refinance. I also reasoned that ten years is long enough that the risk of getting stuck upside-down in an environment where my rate resets higher, is low. Obviously my assumptions could be wrong, but the long time horizon made the risk seem acceptable.
Is “reducing regulatory costs associated with land development” a feasible goal? I did my part advocating for Joe Six Pack Home builder (somebody in my mind who built 1 to 50 or so homes a year) their were some environmental consultants in the room who audibly and wordlessly expressed their dissent, the state regulators were happy for the participation, and the EPA made it clear they understood my concerns. On that issue the Fed and the State hands are tied. Locally/regionally municipalities have bent over backwards for at least the past decade to accommodate developers and homebuilders. I am not sure what more they can do.
Local governments are the policy makers that could establish “low income housing” developments- where buyers have to quality by meeting certain income caps and other requirements in order to be eligible to purchase. It is not clear that local governments actually want that because if they did, the local municipality would waive impact fees.
From the NAHB website-
Nearly all (98.9 percent) of builders reported experiencing some type of regulatory cost during construction. Added together, the average of these costs across all homes in the sample account for 21.5 percent of the builder’s construction costs and 13.3 percent of the final house price.May 5, 2021
I looked at developer agreements for comparable muni’s at one point to determine where my city stood, we bore more of the cost than other cities i looked at, at the time. I guess at some point a muni could incentivize additional development for low cost housing, but to do so here would mean finding money from somewhere else. The tax payer here already subsidizes industry, industry creates demand for housing. Industry moves here for cheap labor, tax rebates, and other economic incentives. Why do we want more subsidized industry if we have to increase tax rates to subsidize housing in order bridge the impact of industry on housing costs. As i learned a few moments ago housing costs are blisteringly well beyond reasonable. The economic development tax comes right off of the top with as an element of sales tax, people have just become numb to it, others call it a slush fund. What a mess. A “frakenstein nightmare” a retired builder whom i had a lot of respect for used to say
H-Man, no fix for this problem until rates drop which means no relief for some time coming.