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Home Sales and Builder Confidence Fall, Permits and Starts Still Elevated
The housing market may be approaching a peak as recent figures show a slowdown in home sales amid a slew of headwinds facing the industry.
Yesterday, the Commerce Department reported that sales of new single-family homes fell 2% month over month in February 2022, declining for the second straight month and came in 6% below February 2021 numbers. Economists polled by Reuters predicted that new home sales would rebound to 810,000 in February, from a downwardly revised January figure of 788,000 units.
The new home sales data comes on the heels of existing home sales, which plummeted 7% month over month in February 2022, the largest decrease in one year. Reuters notes that contracts to buy previously owned homes, a leading indicator of home sales, fell for three straight months through January.
Similarly, the National Association of Homebuilders (NAHB) Housing Market Index, a survey of homebuilder confidence and expectations, fell to 79 in March 2022, the third straight monthly decline and a six-month low. While the index recently hit an all-time high in December, and any reading above 50 indicates a majority of builders believe conditions are good rather than poor, factors that are weighing on homebuilder expectations do not look as if they will subside any time soon.
MarketWatch notes that the six-month outlook for home sales fell even more dramatically, dropping 10 points to 70 in March 2022, the lowest reading since June 2020.
Not all housing data has been disappointing for the industry, though. Building permits in the US declined just 1.6% in February 2022, barely below a sixteen-year high set in January. Housing starts also jumped roughly 7% in February, which was the highest level seen since June 2006.
Yet, the market could be reaching an inflection point as there are several there are key factors that may drive further declines through the summer and push home sales and confidence lower in the second half of 2022.
Rising Rates, Sky-High Home Prices Could Keep Buyers on the Sidelines
Recent data coming out of the housing sector has analysts rethinking their previously upbeat home sales forecasts as the once red-hot housing market may be finally cooling off.
Per the Mortgage Bankers Association (MBA), the average rate on a 30-year fixed mortgage with conforming loan balances ($647,200 or less) hit 4.5% on Tuesday, the highest rate seen in roughly three years. Previous estimates expected the mortgage rate to hit 4.5% at the end of 2022, yet the sudden rise hampered demand and caused economists to adjust their forecasts.
Mortgage applications to purchase a home fell 2% in the latest week of data and are down 12% compared to a year ago. Similarly, demand for refinancing plummeted 50% compared to last year.
Lawrence Yun, chief economist for the National Association of Realtors, says he now expects mortgage rates to hover around 4.5% through the year, up from his previous projection of 4%. However, that is enough to significantly affect home sales throughout the year.
Per CNBC, NAR’s latest forecast for home sales is a decline of -6% to -8% this year, more than double their previous prediction of -3%.
Ian Shepheredson, chief economist at Pantheon Macroeconomics, predicts the market is at the beginning of a substantial downshift. Existing home sales could fall as much as 25% from the annual pace set in February as rising rates and lower mortgage demand creates affordability issues which can indicate a slowdown in home sales.
Pantheon Macroeconomics data also shows that the rise in mortgage rates since September has increased the cost of a monthly mortgage payment for a median-priced home by more than $400, or 27%.
That has potential purchasers worried. A recent survey from US News & World Report found that nearly half of US homebuyers ranked affordability as their number one concern in the housing market right now.
The rise in rates comes as home prices remain historically high, creating a significant barrier for new homebuyers that could keep them waiting on the sidelines until rates and prices normalize.
Frank Nothaft, chief economist at CoreLogic, called the situation a “double whammy for potential homebuyers.” He added that “First-time buyers are a sizable part of prospective shoppers and their share of purchases has slipped from one year ago. We will be revising our home sales forecast a bit lower.”
The latest data from CoreLogic also shows that home prices are up 19% in January compared to the same month a year prior. Per Fortune, that is the highest year-over-year increase since the 2008 financial crisis, and additional price hikes could be on the way.
Zillow’s most recent home price forecast predicts that the largest year-over-year increases still await, eventually hitting a peak of 22% in May 2022.
Up until this point, demand for housing has outpaced home price gains, yet that trend may be finally reaching an inflection point. Recent data shows that home sales may have reached a peak as homebuilder confidence has slid over the last few months and six-month expectations plummet. Rising inflation, mortgage rates and home prices may be the confluence of factors that keep homebuyers on the sidelines as affordability remains the number one issue facing potential purchasers.
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