NETL - U.S. Housing Market: Mixed Signals
2023-03-21 10:44:00 ET
Summary
- The housing market continues to experience volatility as rates fluctuate and home prices decelerate.
- Housing activity slowed in 2022 as home prices increased and mortgage rates doubled. This one-two punch caused affordability to worsen to levels not seen in decades and forced buyers to the sidelines.
- In January, homebuilder confidence improved as the 30-year fixed rate mortgage fell below 6% and purchase applications rose 18%.
By Jacob Asbjornson
The housing market continues to experience volatility as rates fluctuate and home prices decelerate.
Housing activity slowed in 2022 as home prices increased and mortgage rates doubled. This one-two punch caused affordability to worsen to levels not seen in decades and forced buyers to the sidelines. For context, the monthly mortgage payment on the median existing home price rose 65% from December 2021 to October 2022.* As buyer interest slowed, homebuilder confidence fell. The National Association of Home Builders Confidence Index fell every month in 2022, to levels not seen since the beginning of the pandemic. However, recent data and homebuilder commentary suggest that the range-bound mortgage rate environment over the last couple of months, paired with decelerating house prices, has caused buyers to re-emerge and activity to pick up to start the year.
In January, homebuilder confidence improved as the 30-year fixed rate mortgage fell below 6% and purchase applications rose 18%. The rate relief was short-lived, though, as the 30-year moved back toward 7% in early March. During this period, purchase applications fell to their lowest level since 1995, illustrating buyers’ sensitivity to rates. Despite the movement in rates, recent homebuilder commentary indicates that the demand to start the year has been better than expected.
For example, Hovnanian ( HOV ) indicated that, “From November’s low point of 1.2 contracts per community, we increased to 1.8 in December and ended the quarter with 3.0 in January. This positive trend continued through February 26, with contracts per community increasing to 3.4.”
The rapid deceleration of home prices has helped the affordability picture as well. After gaining 7.6% in the first half of 2022, the FHFA reported that home prices had fallen -0.93% in the second half of the year. To the extent mortgage rates stay in a range and home prices decline, the buyer affordability equation is likely to improve. Additionally, the current inventory picture provides underlying support for builder development as existing home inventory (units) remains 76% below the peak pre-Global Financial Crises level (July 2007). Moreover, half of existing mortgages are locked in below 3.5%, providing little incentive to add supply to the market.
Alternative measures from both homebuyers and builders have also spurred activity. Recent data show increasing popularity in all-cash payments and adjustable-rate mortgages. Homebuilders have also helped by offering mortgage-rate buydowns. While these may be small at the margin, the combination of all of these variables provides a more encouraging picture for housing affordability and activity as we move into the spring selling season.
*Source: Bloomberg
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U.S. Housing Market: Mixed Signals