A worker drills plywood at a single family home under construction in Lehi, Utah on Friday, January 7, 2022.
George Frey | Bloomberg | Getty Images
The once-hot housing market is cooling at an alarming rate, and some homebuilders say things will only get worse in the new year as new orders dry up.
Soaring mortgage rates have left once-frantic homebuyers on the heels, concerned about their potential investments and the health of the broader economy.
“There’s this cliff that’s happening in January,” said Gene Myers, CEO of Thrive Homebuilders in the Denver area, which has been one of the hottest markets in the years leading up to and during the coronavirus pandemic.
US homebuilders have been a big beneficiary of the Covid economy. Record low interest rates, combined with rising demand from consumers looking for more housing, caused a housing rush unlike anything most people had ever experienced. Home prices have soared over 40% in just two years and builders couldn’t fill orders fast enough. They even slowed sales just to keep up. All of that is over.
According to the US Census, single-family housing starts fell nearly 19% year over year in September. Building permits, which are an indicator of future construction, fell 17%. PulteGroupone of the country’s largest home builders, reported that its churn rate rose to 24% in the third quarter from 15% in the second quarter of this year.
The public housing companies that have reported earnings so far have shown surprisingly strong results, but that’s because much of it is based on a backlog of homes that were contracted last spring. That was before mortgage rates crossed 6% and then 7%.
Now builders are preparing for what comes next. Myers said his company’s balance sheet is incredibly strong right now thanks to a backlog of homes that have sold at high prices, but he predicted the market would be “ugly” by early next year.
“It’s definitely a hard landing for housing,” he said. “Any hope of a soft landing was really dashed last spring when it became clear that our customers, used to such low mortgage rates, would simply go on strike.”
Myers was there during the last housing crash caused by a flawed mortgage market that allowed almost anyone, qualified or not, to get a home loan. It caused a massive real estate rush based almost entirely on speculative buying and selling by investors. Single-family housing starts fell by a staggering 80% from January 2006 to March 2009, but Myers notes that the turnaround has been slower compared to what’s happening now.
“I think we’re seeing the most abrupt change in the market of my career and I’ve been at it for a while,” he said. “I’ve never seen sales just shut down, which happened with us in May.”
downward spiral
Just under six months ago, the start of construction for single-family homes was still 10% higher in a year-on-year comparison. That was just before mortgage rates started to rise really fast. Going from a 10% annual construction growth to a 19% decline over this period is a historically sharp turn.
While new home sales are declining, prices are still higher compared to last year. Much of this has to do with labor and material prices that are still inflated. Some of the price strength can only indicate which homes are selling, namely the more expensive ones. But that too could change soon.
Sheryl Palmer, CEO of the Arizona-based construction company Taylor Morrison, which just reported strong gains for its third quarter, said newcomers are clearly struggling. But she also admitted that high-end buyers aren’t flocking in the door anymore either.
“If we look at our rise and our resort lifestyle buyers, they absolutely can still afford to buy, but emotionally you have to have the confidence,” Palmer said on CNBC’s Mad Money on Friday. “Even at today’s prices, both our FHA and conventional buyers have a lot of wiggle room, but being able to afford it doesn’t mean they have the confidence given what’s going on in the economy today.”
Palmer told analysts on the call that September orders fell “sharp” and that the slowdown was being felt across a wide range of price points, regions and consumer groups. As a result, Taylor Morrison is pulling back land investment, slowing the pace of housing starts and providing additional incentives for buyers.
New-build home sales fell below pre-pandemic levels in September, and cancellations are now double the rate they were a year ago, according to the National Association of Home Builders.
“This will be the first year since 2011 that there has been a decline in single-family home starts,” NAHB chief economist Robert Dietz said in a press release. “While some analysts have suggested that the housing market is now ‘more balanced’, the truth is that homeownership rates will fall in the coming quarters as higher interest rates and persistently high construction costs continue to price out a large number of potential buyers. “
The supply of new build homes remains high, unlike in the existing home market where supply is still scarce. NAHB reported that a quarter of homebuilders are now cutting prices.
And that’s the great unknown. Prices are cooling for both new and existing homes, but analysts are divided on whether they will actually show year-on-year declines and how severe those declines could be. Myers said he heard about a 20 percent drop in new home prices.
“And it sounds really harsh, but looking back, because our construction costs have increased so rapidly, we only have to roll back a little over a year to be 20% down from now,” Myers said. “Thinking about, well, we’re just going to go back to 2020 doesn’t sound nearly as crazy as a 20% price correction. But I think it definitely has to happen if we’re going to get the speed back. “