“Depending on market dynamics and backlog levels in each community, we are becoming more aggressive with pricing ahead of the spring selling season, in order to generate new orders,” KB Home told investors in January after posting disappointing fourth-quarter results.
Fast forward to February, and it looks like we’re watching the housing market correction—which saw new home sales contract at a record pace in the second half of last year—move into a new phase. What’s up? Aggressive builder price cuts coupled with incentives, such as mortgage rate buydowns, are helping builders make sales rise again.
This increase in new home sales may mean that the home price correction on the new construction side is fading. Or at least lose steam for now.
“The builders have taken the most medicine now in terms of prices. And we think nationally, house prices-on the new front, net of incentives-down about 10% from the peak,” Ricky Palacios Jr., head of research at John Burns Real Estate Consulting, said in a video posted there. “There probably aren’t a ton of runways left.”
Let’s be clear: Palacios is talking about the correction of house prices on the new front. On the existing or “resale” side, he thinks the home price correction has a way to go.
“We still think there’s more [home] The price correction comes on the resale side, though. And the resale market is always a sticker for the downside when it comes [home] prices,” said Palacios.
Unlike homebuilders, who have to cut prices in order to move unsalable inventory, existing homeowners are usually more resistant to these cuts. That resistance is why existing home prices typically fall in a declining housing market.
Let’s take a closer look at the corrections we have on the side. Here is the data.
For 124 consecutive months, from the bottom of the previous housing boom in February 2012 to the top of the Pandemic Housing Boom in June 2022, the price of single-family homes in the US, as measured by the seasonally adjusted Case-Shiller National Home Prices. Index, posted positive on monthly house price growth.
That streak is now over.
Through the latest reading in November 2022, existing single-family home prices are down 2.5% from their peak in June 2022. On the one hand, the drop is the second largest home price correction in the post-World War II era. On the other hand, this is a mild correction compared to the peak house price decline of 26% between 2007 and 2012.
It will be six more weeks until the Case-Shiller reading for January is released. However, preliminary data suggests that the house price correction on the existing housing side may disappear by 2023.
Zillow Home Value Index data analysis by fortune (see chart above), found that 79% of the nation’s 200 largest housing markets experienced a decline in home prices in September. The numbers began to decline, slowly but surely.
In October, 76% of these major markets experienced a decline in home prices. In November and December, it dropped to 64% and 67%, respectively. However, in January, only 47% of the nation’s 200 largest housing markets registered a monthly decline in home prices.
Last year’s mortgage rate shock, which saw the average 30-year mortgage rate rise from 3% to over 6%, has indeed led to a house price correction. That said, the correction continues to be bifurcated: Some markets are seeing a clear correction, while others haven’t seen anything yet.
“If you’re anywhere in Texas or west of Texas, you might be down more…if you’re anywhere in East Texas, you might not be down, if at all,” Palacios said.
The bifurcated home correction is why KB Home, which has a high concentration of business in the West Coast and Mountain West market, saw a cancellation rate that exceeded its peers, which did other business in the Midwest and Northeast.
When it comes to home price corrections, there’s still one big wildcard: Mortgage rates.
“Previous price cuts now combined with substantial rate cuts are helping to stabilize new home prices (in some markets). [mortgage] rates remain around ~ 7% or break above, deeper [new and existing] a price cut may be necessary,” Palacios said fortune.
Want to stay updated on the housing market correction? Follow me on Twitter @NewsLambert.
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