- Homebuilder sentiment dipped in July to contractionary levels, signaling a slowdown in the housing market.
- With mortgage rates falling and home sales slowing, buyers finally have a chance to grab a bargain.
- The opportunity won’t last long, as more rate hikes – and higher mortgage rates – are on the way.
The housing market of 2020 has turned completely upside down.
Government assistance given at the start of the coronavirus pandemic triggered an unprecedented windfall for buying a home. Record mortgage rates have made homes much more affordable, and Americans have flocked from densely populated cities to suburbs and suburbs. The few homes made available were quickly bid above their listing price and sold within days. Buying a home quickly became a fantasy for those who lacked the time, energy, and considerable cash to compete in the hot market.
But the pandemic-era mortgage deals are over — and that’s put a damper on the real estate frenzy.
In just a few months, home sales have slowed dramatically and contractor confidence has plummeted. Both the National Homebuilders Association and the Wells Fargo Housing Market Index – which measures homebuilder confidence – fell in July, marking the first time since May 2020 that homebuilders have seen the sector in recession. .
The crisis hints at a shift in power in the housing market. Builders are no longer assured of the easy profits they have enjoyed thanks to the recent moving boom. And despite still-high prices, buyers are clawing back some of the power they’ve been missing over the past two years. With mortgage rates falling, inventories rebounding and home sales slowing to multi-year lows, potential buyers have a fleeting chance to get a deal while they’re still around.
Housing slump opens door to marginalized buyers
The decline in builder sentiment is attributed to higher construction costs that have made it harder for homebuilders to operate – and ultimately build more homes.
“Continued growth in construction costs and high mortgage rates continue to weaken market sentiment for builders of single-family homes,” NAHB president Jerry Konter said in a statement, adding that prices were also deterring buyers. to enter the market.
As inflation continues to wreak havoc on the economy, building material prices have climbed 20.4% since 2021 and 31.3% since January 2020. The increases added up to $14,000 to the construction costs of an average newly built single-family home.
The rise led to a slowdown in housing construction.
In July, residential construction fell at its slowest pace since February 2021. Falling for the third consecutive month, housing starts fell 9.6% to an annualized rate of 1.4 million units, according to the Census Bureau.
However, despite the slowdown in new home construction, housing stock is rising as homes stay on the market longer, but that doesn’t mean home ownership has become more affordable. In July, the national median list price rose 7% year over year to an incredible $412,739.
With less affordable housing available and inflation and rising interest rates driving up loan costs, demand is weakening in the real estate market. As more buyers put their homeownership dreams on hold, that makes way for a bigger change in the housing industry. Determined buyers who have the cash to pay for a still-expensive home may have an easier time now than a few months ago, but the window of opportunity is likely to be limited.
In a reversal from 2021, buyers are now forgoing more trades as they regain leverage due to lower demand. Data from property brokerage Redfin shows around 16.1% of home purchase deals fell through in July – marking the highest percentage on record except for March and April 2020, a time when the onset of the coronavirus has almost brought the housing market to its knees.
The pivot separates the housing sector from the rest of the economy. The recovery from the coronavirus recession has held steady through 2022 despite slowing from last year’s rapid pace of growth. In July alone, inflation eased overall, job creation doubled economists’ forecasts and wages rose at a historically high rate. Surveys of business leaders have indicated that the service and goods-producing sectors expect continued growth in the near term.
The housing market was the only bright spot at the start of the pandemic, as lockdowns and virus fears stifled economic activity. Now, the opposite is true, and the way forward will likely make the housing downturn worse.
Mortgage rates are falling, but they won’t stay that way
The Federal Reserve has already withdrawn much of the aid that fueled the housing boom. Several larger-than-usual interest rate hikes have pushed mortgage rates up at the fastest pace in decades. The average rate for a 30-year fixed-rate mortgage rose more than two percentage points – from 3.11% to 5.81% – between January and June.
The weeks that followed offered some relief. Expectations of a slowing rate hike cycle pushed mortgage rates lower. The average 30-year mortgage rate now stands at 5.13%, leaving potential buyers with a better deal than a few weeks ago.
However, the crisis should not last. Investors are already expecting another half-percentage-point hike in the benchmark rate at the policymakers’ meeting in September, and Fed officials forecast in June that the rate would climb to 3.5% against 2.5% currently by the end of the year. As the benchmark rises, mortgage rates are almost guaranteed to follow.
Officials have previously hinted that despite signs that inflation peaked in June, they are not done with raising rates. The bull cycle is “far from nearly over,” San Francisco Fed Chair Mary Daly said in an Aug. 2 interview with CNBC’s Jon Fortt, adding that expectations for impending rate cuts are “a puzzle for me”.
Continued tightening and even higher mortgage rates will put even more pressure on house prices. This could mean that the window of opportunity is slowly closing for potential buyers hoping to secure a good buying deal.
The good news for buyers is that the Fed’s next rate hike won’t arrive for another month, when the Federal Open Market Committee meets on September 21. Until then, buyers still have the opportunity to take advantage of slightly lower mortgage rates and a market that is turning in their favor.