Home News Homebuilders say steeper downturn is coming as buyers pull back

Homebuilders say steeper downturn is coming as buyers pull back

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Workers excavate plywood at a single-family home under construction in Lehi, Utah, Friday, January 7, 2022.

George Frey | Bloomberg | Bloomberg | Getty Images

The once-hot housing market is cooling off at an alarming rate, with some homebuilders saying it will only get worse heading into the new year as new orders dry up.

Rapidly rising mortgage rates have set once-enthusiastic homebuyers on their feet, worrying about future investments and the health of the economy as a whole.

“This cliff is happening in January,” said Gene Myers, CEO of Thrive Homebuilders in the Denver area, which was one of the hottest markets in the years leading up to the pandemic.

US home builders have been the main beneficiaries of the Covid economy. Record-low interest rates, combined with a surge in demand from consumers for more living space, have created a housing shortage unlike anything we’ve seen before. House prices soared by over 40% in just two years, and home builders couldn’t keep up with orders fast enough. They even slowed down sales just to keep pace. It’s all over.

Single-family home starts fell nearly 19% in September from a year earlier, according to the U.S. Census. Building permits, an indicator of future construction, fell by 17%. pult groupOne of the largest homebuilders in the US reports that its cancellation rate jumped from 15% in the second quarter of this year to 24% in the third quarter.

Public housing builders that have reported earnings so far have posted surprisingly strong results, much of which is based on backlogs of homes that were signed last spring. That was before mortgage rates were over his 6% and then over 7%.

Builders are now preparing for what comes next. Myers said the company’s balance sheet is now incredibly strong, thanks to a backlog of homes sold at high prices, but predicted the market would be “ugly” by early next year. .

“This is definitely a housing hard landing,” he said. “The hopes of a soft landing completely vanished last spring when it became clear that customers accustomed to low mortgage rates were going on strike,” he said.

Myers was present during the last housing crash, caused by an imperfect mortgage market that allowed just about anyone, eligible or not, to get a mortgage. It has caused massive price increases in homes based almost entirely on speculative buying and selling by investors. Single-family home starts fell by a staggering 80% from January 2006 to March 2009, but Myers said it was a gradual change compared to the current situation.

“I think I’m seeing the most radical shift in the market in my career. I’ve been there for a while,” he said. “We haven’t seen the drop in sales that happened in May for us.”

negative spiral

Just six months ago, single-family housing starts were still up 10% year-over-year. That was right before mortgage rates started to skyrocket. Going from a 10% annual increase in the construction industry to a 19% decline over the period is a steep transition in history.

Sales of new homes are down, but prices are still higher than they were a year ago. Much of this has to do with the continued rise in labor and material costs. Part of the price strength may just be an indication of which homes are selling—the more expensive homes. But that may soon change, too.

Sherrill Palmer, CEO of the Arizona-based homebuilder, said: Taylor Morrisonjust reported strong third quarter earnings, but says entry-level buyers are clearly struggling. But she also admitted that high-end buyers aren’t rushing to her door.

“Looking at our moving and resort lifestyle buyers, they can still afford to buy, but they need to be emotionally confident. On CNBC’s “Mad Money”“Even at today’s rates, both FHA and traditional buyers have a lot of room, but given everything going on in today’s economy, just because they can afford it doesn’t mean they can afford it. I am not.”

Palmer told analysts that new orders fell “sharply” in September and the slowdown was felt across a wide range of price points, regions and consumer groups. As a result, Taylor Morrison is holding back on land investments, slowing new construction starts, and offering additional incentives to buyers.

Sales of new homes fell below pre-pandemic levels in September, and cancellations doubled from a year ago, according to the National Association of Home Builders.

“This will be the first year since 2011 that single-family starts have declined,” said NAHB chief economist Robert Dietz. But the reality is that homeownership rates will drop in the next few quarters as rising interest rates and continued construction costs continue to push prices down for many potential buyers. It will decline.”

The supply of new homes continues to increase, unlike the second-hand market, where properties are still scarce. NAHB reports that a quarter of builders are currently cutting prices.

And that’s the big unknown. Prices for both new and existing homes have fallen, but analysts are divided on whether and how much they will actually fall from year to year. Myers said he’s heard stories of new-build prices dropping 20 percent.

“This may sound very harsh, but in retrospect, construction costs rose so quickly that we only needed a little over a year of adjustments to be 20% less than we are today,” Myers said. said. “So when you think about it, going back to 2020 doesn’t sound as crazy as a 20% price correction, but I definitely think we have to do it to get back to speed.”

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