Fed Chairman Jerome Powell made it clear last summer: Spiking mortgage rates would help “reset” the US housing market, which has been a nightmare for buyers during the pandemic.
Of course, spiking mortgage rates won’t create more housing. However, higher rates could in theory “rebalance” the US housing market by throwing cold water demand for housing in a pandemic, allowing inventory breathing room to rise, and pushing home prices lower. That’s what happened in the second half of last year: Sales for new and existing homes went into free fall mode, while US home prices began to fall for the first time since 2012.
But fast forward to 2023, and it looks like the free home sales may be over. In fact, just this week Goldman Sachs published a paper titled “Housing Outlook 2023: Finding the Trough.” The newspaper said that home sales are down, while the correction in home prices is a bit late.
“We suspect that existing home sales may decline faster but will decline in Q1,” Goldman Sachs researchers wrote. “We expect the peak decline in national house prices to be about 6% and prices to stop falling by mid-year. [in 2023]. On a regional basis, we project a larger decline along the Pacific coast and Southwest region.
To better understand if the US housing market recession is actually slowing down, fortune reached out to Zonda’s chief economist Ali Wolf. When he wasn’t traveling around the country talking to home builders, he was advising the White House on housing issues.
The following fortuneQ&A with But Wolf.
luck: There are early signs that demand for housing, which fell last year as mortgage rates rose, is starting to recover. Did you see this too? If so, is this just seasonal, or is it also a result of lower mortgage rates?
There is an uptick in buyer interest since the beginning of the year related to three main things: seasonality, acceptance, and discount.
Seasonality: The traditional housing market slows down at the end of a certain year, picks up again in January, and goes into full force during the spring selling season starting around the Super Bowl. Early indications are that buyers are out shopping again. Currently, it seems that there are more buyers looking than actually signing contracts, but the increased traffic shows the underlying interest: 38% of builders reported to Zonda that the traffic has been stronger than expected in January so far. Something to watch out for in the coming months is resale inventory. We see many homeowners de-list their homes in November and December when their homes don’t sell as quickly or for as much money as they would like. The spring selling season usually brings more inventory, so we’ll have to see if these sellers decide to list again at a stronger time of year for homes.
Acceptance: Consumers have been suffering because of low mortgage rates. For example, if a consumer was able to afford a monthly payment on a $500,000 home at the beginning of last year, without changing their budget, they are now looking for a home in the $350,000 range. For some consumers, they are unwilling or unable to proceed with the purchase. For others, they are entering the acceptance phase. We are in the 10th consecutive week of average mortgage rates below 7%. The stability of this rate gives consumers confidence in the current market. Some sell existing homes and many builders offer financing to help reduce interest, with adjustable-rate mortgage options and 30-year fixed-rate mortgage options.
Discounts: Homebuilders now represent more than 30% of the overall housing stock. Builders are in the business of building and selling homes. As a result, we have seen manufacturers offer price cuts and incentives to entice consumers. What we are seeing is that at the beginning of the housing crash, builders were offering a price cut as low as 1 or 2% off the base price. All it does is tell consumers to wait, because house prices will be lower in the future (ie consumers have a deflationary mindset). Builders learn quickly that it is better to “rip off the band aid” with the price of the house, but only adjust quickly and quickly to find the market. As a result, about 40% of builders have lowered their house prices by between 5 and 15%. For consumers, FOBATT [fear of buying at the top] mentality has calmed a bit because they no longer wait for prices to start falling.
Q: Have builders found success with price shopping?
Zonda data shows that more than 50% of new housing communities across the country offer some type of incentive to consumers. These incentives can range from full rate locks to funds for closing costs or options and mortgage rate upgrades and buydowns. Mortgage rate purchases are essentially builders paying points to lower their mortgage rates. Builders pay anywhere between $10,000 and $70,000 to lower their rates. For consumers, the main reason they are being pulled back from the housing market is record affordability. Lower rates, especially when builders offer lower rates on 30-year fixed mortgages, have been effective in bringing some consumers back into the market. Simply put, buydowns are expensive but effective.
Q: Do you have any data on how much/how many builders are reducing prices?
Our December builder survey showed that 43% of builders are cutting prices each month, while 56% are leaving prices flat. For January, our initial reading is that 56% of builders made prices flat, 32% reduced prices, and 12% increased. [home prices]. In some markets we have seen the average detached new home list prices down 20% from the peak; the other price is still at the peak.
Q: By 2023, Zonda predicts that US home prices will decline about 15% from their peak. Have you made any changes in you hope for US housing prices?
We still expect home prices to decline in 2023 compared to 2022, but how deep the decline will be depends on: how quickly sellers ‘find the market’ with price cuts, what happens to mortgage rates, how inventory levels are, and what happens. related to the US economic recession.
Want to stay updated on home improvement? Follow me on Twitter @NewsLambert.
Learn how to navigate and build trust in your business with The Trust Factor, a weekly newsletter that examines what leaders need to succeed. Log in here.