The Balboa Real Estate Report: 12-24-2022
‘Twas the night before Christmas when all through the house. Not a creature was stirring because this house has spent way too long on the market, interest rates were high, and buyer demand has been weak.
It’s been pretty obvious housing and real estate market has been hit pretty hard this year. The global economic slowdown, rising inflation and high mortgage rates have kept many buyers on the sidelines this year. The drop in demand has left sellers and homebuilders stuck with listings and new inventory for longer periods of time.
To get a sense of how bad things have been in the housing market, data released on Monday from the National Association of Home Builders (HAHB) showed homebuilder confidence has been impacted for all of 2022.
Builder confidence in the market for newly-built single-family homes posted its 12th straight monthly decline in December, dropping two points to 31, according to the (NAHB)/Wells Fargo Housing Market Index (HMI). Basically, homebuilder confidence has come down every month this year. The December HMI is also the lowest confidence reading since mid-2012, with the exception of the onset of the pandemic in the spring of 2020.
“Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “But with construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices.”
Konter added that only 35% of builders reduced homes prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.
I will say 35% of builders reducing prices is surprisingly low. I’ve personally seen homebuilders offering all sorts of incentives to attract buyers here in my home state of Texas.
The weak homebuilder sentiment was also reflected in housing starts data from the US Census Bureau on Tuesday. Housing starts were down 0.5% in November and down 16.4% from the year-ago month.
Single-family housing starts dropped 4.1% to a seasonally adjusted annual rate of 828,000 units in November. Single-family building permits also dropped 7.1% to 781,000 units, the lowest level since May 2020.
There was some strength in Multi-family housing starts, which gained 4.8% to a rate of 584,000 units, the highest level since April. This was mostly driven by stronger demand for rentals, as high-interest rates have led many potential homebuyers to wait out the market. Multi-family permits were down, however, dropping 17.9% to a rate of 509,000 units, the lowest level since May 2021.
Overall, permits for future home construction plunged 11.2% to a rate of 1.342 million units last month, the lowest level since June 2020.
New Home Sales Vs Existing Home Sales
On the bright side, with inflation continuing to cool down, we have also seen some pockets of demand as mortgage rates continue to come down from its yearly peak of 7% seen back in October. Sales numbers were up last month, and mortgage volume (applications) is still picking up.
Sales of newly constructed homes rose 5.8% in November, according to a joint report from the US Department of Housing and Urban Development and the US Census Bureau on Friday. This is the second consecutive month of sales increases, but sales were still down 15.3% from a year ago.
This is positive news for homebuilders, but the same can not be said for existing home sales.
Existing-home sales declined for the tenth month in a row in November, according to the National Association of REALTORS (NAR), which showed all four major US regions recorded month-over-month and year-over-year declines.
Existing-home sales fell for the tenth consecutive month to a seasonally adjusted annual rate of 4.09 million. Sales slipped 7.7% from October and 35.4% from the previous year.
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The median existing-home sales price rose to $370,700, an increase of 3.5% from one year ago.
The inventory of unsold existing homes retreated for the fourth straight month to 1.14 million at the end of November, or the equivalent of 3.3 months' supply at the current monthly sales pace.
Demand Still Picking Up?
As mentioned earlier, with inflating easing some, we are still seeing mortgage rates come down while mortgage applications continue to rise.
Mortgage applications were up nearly 1% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 16, 2022.
The MBA’s Market Composite Index, a measure of mortgage loan application volume, increased 0.9% on a seasonally adjusted basis from one week earlier.
Following the release of its index, Mike Fratantoni, MBA’s SVP and Chief Economist made some interesting comments on the slowdown in mortgage rates.
“The latest data on the housing market show that homebuilders are pulling back the pace of new construction in response to low levels of traffic, and we expect this weakness in demand will persist in 2023, as the US is likely to enter a recession,” Frantantoni said.
“However, if mortgage rates continue to trend down, as we are forecasting, more buyers are likely to return to the market later in the year, as affordability improves with both lower rates and slower home-price growth.”
It just so happens that the average 30-year mortgage rate has come down for a sixth straight week. Freddie Mac reported Thursday that the average on the benchmark 30-year rate dipped to 6.27% this week from 6.31% last week. A year ago the average rate was 3.05%.
My 30-Day Outlook:
Even though we are nearing the end of 2022, expect homebuilders to stay aggressive into January with plenty of buyer incentives. Some individual home sellers are also finding ways to be creative in attracting offers, by including seller contributions. This does not mean we are not in a buyers’ market, far from it actually since interest rates are still high compared with last year and inventory is still limited. Even though we have seen buyers holding off from purchasing homes due to the high rates, this has also kept sellers off from listing properties. We will likely see more buyer interest and more listings if inflation continues to slow and mortgage rates keep falling. Otherwise, we are in for a tough market overall heading into next year.
Sources:
Assistant Vice President, Wealth Management Associate
1yThanks for sharing