Anyone who follows housing knows it’s pretty wild right now. The word “wild” evokes a degree of subjectivity – after all, some people like wild things. Some people don’t do that very much.
But more and more people want it to settle down. (Unless you’re listing a home with plans to cut back sharply for your next home – in which case, you’ll be a happy camper).
But for potential buyers, flippers and investors in rental properties, there is a lot of sticker shock. And the latest knot in the mix is the sticker shock homebuilders are seeing in terms of raw materials and labor costs. There are huge bottlenecks and price hikes throughout the builders supply chain, and this threatens to dampen new supply just when it is most needed to meet insatiable demand.
The demand side of the housing market is on the edge – a combination of organic growth from demographic shifts as millennials become the largest housing block, and the pent-up demand left over from the tumbleweed months of the pandemic.
Everyone with their hands in the industry has their anecdotes. Bidding wars before even an ad shows up on the radar. New build sold for $ 30,000, $ 40,000, $ 60,000 over a month old specification before the foundation is even laid. Or buyers on a budget who visit 70, 80 or even 100 properties with no luck, constantly tuning their wish list based on size, location and features.
Here are the facts that determine how the market got so wild and what to expect in the coming months.
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Prices. Only. To keep. Rising.
Last week, we saw the latest S&P CoreLogic Case-Shiller National Home Price Index for the March period, pushing another scorcher. The national index rose 13.2% year over year – the fastest growth since 2005. It was also the 10th straight month of accelerating earnings, surpassing February’s 12% growth.
The results were similar across all urban sub-indices, with a Case-Shiller composite with 20 cities up 13.3% and 10 cities up 12.8%.
Two brief notes about these average selling prices. First, this has been delayed. We are already 8 weeks ahead of the data monster here. The estimates are for about 14% year-on-year growth in April… and recent months have exceeded estimates. We are unlikely to peak in this price increase yet, but some signs suggest that we are only a month or two away from a peak in the near term.
Second, average sales prices continue to rise even as mortgage rates rise. The average rate on a 30-year fixed value ticked above 3% for the first time in two months last week. Most economists predict that rates will rise higher throughout the summer while remaining moderate enough not to cause tremors in the housing market. The wind of inflation is out there, but nothing is blowing over yet.
In March, there were as many new homes selling for more than $ 500,000 as homes selling for less than $ 300,000. Just two years ago, 140% more homes were sold for less than $ 300,000. That’s grim, especially since a lot of those houses are in zip codes that aren’t used to seeing things like that.
Affordability is starting to slip
The math is pretty clear in this regard. Skyrocketing selling prices mean that affordability will decline for an average buyer unless household incomes rise faster than house prices and mortgage rates are flat or fall. And that is exactly what we are starting to see.
Income gains were strong nationally, about 11% year-on-year (excluding stimulus payments). Yet that is less than the increase in average house prices. The other factor is mortgage rates, which have remained stable enough in 2021 to not shift the equation. But it’s a steep zone we’re in if we (rightly?) Assume that average sales prices haven’t peaked yet.
The National Association of Realtors (NAR) publishes an affordability index that still shows an overall solid trendline, but the latest data suggests a downward click in affordability across the country. House prices are just rising too fast.
Affordability is increasingly an issue in 45 of the 50 largest markets, according to First American Economics.
This dynamic will lead to more sticker shock for more buyers, and on the ballpark, more people withdrawing from making purchases at this point. This should give us a marked price spike and a mild drop in average selling prices in the coming months.
This assumes that mortgage rates will remain an ‘equal factor’ and will not move sharply in either direction all summer. The Federal Reserve, for its part, is committed to continuing to buy mortgage-backed securities (MBS) and has become a cheerleading group with just one chant, “Don’t worry, we’ll keep interest rates low for as long as humanly possible. to keep.” They have some power to keep that promise, but the financial markets will eventually choose them.
On the big side of the economy, all signs point to green. GDP in the first quarter was 6.4% and unemployment claims were just hitting a one-year “pandemic low”. All good, but also indicative of potentially higher interest rates in the coming months.
Too few properties, too many buyers
A sad statistic: According to data from Altos Research, the stock of single-family homes for sale made the highest weekly jump in more than two years last week. Why is that sad? Because it is a drop in the bucket in terms of need.
Demographics, pent-up demand from 2020 onwards, secular shifts in remote working options – all of these factors are driving more eager homebuyers. But increasingly individuals have to compete with investors large and small, from entrepreneurs to gigantic pools of institutional capital, foreign and domestic.
Homebuyers are under pressure
In Thursday’s NAR Pending Home Sales report, NAR’s chief economist Lawrence Yun noted, “The signed contracts are approaching pre-pandemic levels following the surge due to the lack of adequate supply of affordable housing. The market in the higher segment is still moving strongly as there is more inventory. “
This again speaks to the affordability issues that are increasing in the lower and middle price zones of the market. And it already appears in the data. Existing home sales saw an unexpected drop of 2.7% in April, and pending home sales fell 4.4% from expectations of an increase. Boots on the ground suggest that current trends are accelerating.
Data from Zonda research indicates that potential marginal buyers experience significant hesitation – and sticker shock. In May, buyers’ hesitation rose to 40%.
Construction is unwieldy
Yep, it’s a bad pun. Sometimes we can’t resist. But the construction of new houses has stalled due to rampant supply constraints due to the raw material costs that are considered a supernova. Copper is up 34% since the start of the year. And wood? Um, well …
A Denver builder says they “limit sales in all communities and leak on lots. Material availability is of increasing concern. “
And a Charlotte builder adds: “No pre-sale from now on. Starting specifications and price on plasterboard. Sales are still strong, but we are starting to see a slight slowdown as we have driven up prices significantly. “
A contractor in Raleigh-Durham “is beginning to see some reluctance and concern about house prices that are balancing to some extent the shopping frenzy we’ve seen in recent months.” The builder continues to raise prices: “We get notifications about higher material and labor costs every day!”
Home builders face a big problem: They are trying to estimate how much they can actually sell a new home, given the higher and higher costs are compressed margins. The price increases they implement will continue for the time being. But it’s a daily struggle when window frames, doors, wiring, and foundation materials rise 10% to 15% per month.
The coming months will be critical tone-setters. Will supply and demand come back into balance? Or will persistently higher average house prices push people out of the market? The latter creates more clutter than most real estate investors are prepared to deal with, but could be great for rental property owners as more people will shrug and continue to rent.
The ultimate X factor is the trend of mortgage rates – and in particular, inflation that changes mortgage rates unchanging. The Fed can applaud anything, but if inflation continues to rise, the market will move no matter what the Fed says or wants. Things like lumber prices, agricultural commodities, metals, fuel – they are already rising much faster than “declared inflation”.
For now, it’s stable as she enters the mortgage lending country, but wild times may come around the corner.
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