_edited.jpg)
nflation remains at 40-year highs while national housing sales levels have reverted back to pre-pandemic 2019 levels, according to Zonda’s Ali Wolf and Tim Sullivan.
As inflation continues to persist at 40-year highs and the Federal Reserve continues to take an aggressive approach to rein in inflation, the housing market—already at its own inflection point due to slowing sales and increasing cancellations and incentives—is likely to slow. Since housing is an interest-rate sensitive industry, efforts from the Federal Reserve to increase the federal funds rate to tame inflation will have an impact on mortgage rates, affordability, and consumer confidence in the housing sector. On Zonda’s National Housing Market Update webinar, chief economist Ali Wolf says “there’s an argument to be made” that many parts of the country have softened and weakened in response to the ongoing economic conditions.
“[Housing] slows quicker than the rest of the economy, because when the rest of the economy is good, interest rates go up and [housing] slows,” Wolf says. “And then [housing] can bring the economy down. But on the other side, [housing] rebounds quicker.”
Wolf says there are some indications that inflation is either past its peak level or will reach its peak in the next few months. The goods market—which includes housing, furnishings, electronics, and durable goods—is beginning to see price discounts, and gas prices, while still up 40% on a year-over-year basis, declined 11% month over month. However, inflation remains elevated and GDP decreased for the second consecutive quarter in 2022, indicating that the economy may be in a recession. While Wolf says the economy may not be in a recession just yet, because of positive job growth, a recession is very likely on the horizon.
“Housing starts have slowed considerably; ISM, which measures manufacturing, is coming down, but it’s still in growth territory. The same thing applies to retail sales and small business hiring. Leading economic indicators have gone down,” she says. “Whether or not you want to say tomorrow we are in a recession, we have a lot of top-level economic indicators that are starting to shift.”
Signs of Slowing in the Housing Market
Zonda’s most recent division president survey, collected during the third week of July, found 30% of builders reporting demand to be slower than expected, but not worrisome. Approximately 55% of respondents reported demand was both slower than expected and a cause for concern. The Zonda New Home Pending Sales Index, also released during the third week of July, indicated new-home contract sales in June were back to 2019 levels. Some markets, including Phoenix; Sacramento, California; Salt Lake City; Las Vegas; Denver; and Austin, Texas, are performing below 2019 sales levels, according to Zonda data.
“[These markets] have really seen a significant downshift in overall demand. These are the markets that had the highest level of home price growth, the markets that were the most frothy, that were growing really quickly,” Wolf says. “You could justify it because of job growth and migration. But you’ve reached a point where, as the monthly mortgage payment has gone up at least 40% since the beginning of the year, there are some people who have stepped back.”
Some markets in the Southeast continue to perform above 2019 levels because they remain “investor hotbeds,” according to Wolf. Markets in the Southeast have strong migration numbers and household formations, which support confidence in the investor cohort of buyers.
In addition to retreating sales levels, a high percentage of builders are reporting an increasing number of cancellations, according to Zonda. While a few months ago, 50% of builders reported being able to easily resell homes after cancellations, only 13% said they could easily resell in the July survey. To mitigate lower demand and buyer hesitancy, 73% of builders reported increasing incentives month over month in July. While the majority of incentives are closing costs with preferred lenders, builders also are reporting performing rate buydowns or rate locks and contributing money toward options or closing costs.
“We had some builders that said traffic is so low, demand has really fallen off a cliff, [and] there’s no amount of incentive that’s helping,” Wolf says.
Following months where builders reported increasing prices in high numbers, 70% of builders reported no price increases and 20% of builders dropped prices, according to the Zonda survey. In response to slow demand, 87% of builders reported plans to slow starts.
Similarities, Differences From 2008
While headlines continue to reference an impending housing bubble and include callbacks to 2008, Wolf says it is important to understand context and how much has changed since the Great Recession. While 24% of loans had a credit score of under 660 and 24% of loans had credit scores above 760, the shares during the current cycle are 6% and 70%, respectively. Zonda senior managing principal Tim Sullivan says the percentage of adjusted-rate mortgages during the current cycle are significantly below the levels seen before the Great Recession.
“I get that the run-up in home prices can draw that parallel [to 2008], but it’s important to rationalize and keep in the back of our mind that there are similarities, but there are also differences, and the differences are impactful,” Wolf says. “I don’t want to pretend there won’t be pain, and, even with these sound fundamentals, if some consumers pull back, the market has slowed.”
Additionally, Wolf says the quick appreciation of prices since the beginning of the pandemic offers an interesting buffer not present during the Great Recession. While a 20% drop in prices from peak levels in 2007 ahead of the Great Recession reverted prices back three years, a similar hypothetical 20% drop in prices from the current peak would revert prices back 1.5 years, according to Wolf.
“The existence of the equity and how long we’ve had the buildup in equity and how quickly we’ve had the run-up in prices offers us this really interesting buffer. A 20% drop in home prices last cycle caused a lot more damage than a hypothetical 20% drop would this time,” she says. “Not only because of the duration, but also because of who bought and the fundamentals that were behind those buyers.”
Real-Time Housing Statistics
Sullivan says a third of surveyed builders reported a decline in gross contract sales. Additionally, many builders reported that while gross contract sales have increased in July, both June and July had more cancellations than sales. Additionally, Sullivan says because the pipeline for builders has “a significant number of units,” builders are exercising caution in their land strategy. While the supply chain conditions have improved for some categories—including lumber—garage doors, windows and doors, HVAC, and cabinets remain difficult to source, Sullivan says.
“The biggest [builder] worries have to do with affordability: inflation, consumer confidence, interest rates, mortgage rates,” says Sullivan. “[But additionally], what we’re starting to see is the concept of how to plan for 2022 and beyond. That wasn’t even mentioned in February. Now with all these different levels being changed, we have builders asking what is the new normal and how do we move forward from this?”
The next National Housing Market Update webinar will be Sept. 13 at 11 a.m. PT/2 p.m. ET.