In 2023, the housing market will be divided into two distinct segments. The existing home market will experience a different reality from the new home market.
In addition, the new-home market gained market share, largely due to the limited inventory of resale homes, the lock-in effects, and the possibility of buying down mortgage rates. Ali Wolf, Zonda’s chief economist, said that October qualitatively felt like an “inflection point” in the new home market during the latest National Housing Market Update Webinar.
A survey conducted by Zonda found that 64% of builders surveyed said the demand in October was lower than anticipated. Notably, 32% said that the slower demand was a concern. Wolf stated that while seasonality is usually present in September or October, the current market for new homes can be described as “seasonality plus.”
We are experiencing real seasonality for only the third or fourth time in the last three to four years. We don’t believe it is just seasonality. Wolf stated that the problem is more apparent with some of our feedback.
She stated that builders had expressed the fact that velocity in the market has “all but disappeared.” Moreover, entry-level buyers continue to be priced out while up-level buyers are “spooked’ by market dynamics.
In most markets, the October data are still higher than last year’s figures. Wolf stated that you’re seeing a more pronounced seasonal decline than you might expect at this time of the year.
Consumers, the Economy and
The overall economy is resilient, even though the housing market may have reached a turning point. Gross domestic product (GDP), which is the GDP on a yearly basis, grew by nearly 5% in the third quarter. Wolf stated that the growth was driven largely by consumer spending on goods and services.
“We reached a point where people had surplus savings. This excess was spent in the economic system, which is what fuelled our inflation figures.” “For most households, this excess savings is now depleted except for the highest-income families,” Wolf said.
She said that while consumer spending is still high, the savings rate has fallen below pre-pandemic levels. Credit card balances have also increased. Many consumers who have student loans will also be paying back their debts, which may impact income-to-debt and housing market decisions. Wolf noted that the Federal Reserve’s decision to pause rate increases at its last two meetings was a result of the Federal Reserve’s interest rate-hiking pause, as well as the loans and broader spending across the economy.
According to the dual mandate of the Federal Reserve of maximum employment and stability of prices, the labor market gained an average of 240,000 new jobs every month in 2018. This is a positive development, but the level of unemployment remains high compared to pre-pandemic levels. The inflation rate has also dropped to between 3%-5%, down from its peak of 9% that was reached in 2022.
Does the job market continue to cool down? Is inflation continuing to cool? This will determine whether [the Fed] keeps a pause or if they feel the need to hike again at the end of the year or in the first part of next year,” she said.
Wolf said that understanding the economic background is crucial for the housing industry “because a lot goes on in a counterintuitive way.”
Wolf stated, “we’,re in a situation where bad news about the economy is good for our business, but good news about it is bad for us.” We saw it in October when we received a really good jobs report and saw interest rates rising. The combination of the jobs report and GDP report changed investor confidence.
Housing Market Report
The housing market continues to be affected by affordability shocks, especially existing home sales. Mortgage rates were near 8% in October, and the monthly payment for many major markets in January 2022 was 60% more than it was in October.
We have seen that this low resell stock has pushed people to the new home market. Wolf explained that the resale stock is not just limited but also aging and costly. “New homes are usually more expensive than existing ones.” The price gap has been narrowing.”
Despite the dynamic supporting the new home market, builders share the impacts of “seasonality plus” in the field. Tim Sullivan, a chief advisory officer at Zonda, said that builders surveyed were often referring to “scarce land,” “expensive and unsupplied,” “challenging costs environment,” “price-sensitive,” “cautious,” and “slowing (and] competitive.”
According to Sullivan’s research, builders are still enthusiastic about land purchase, but it is becoming increasingly expensive. Zonda surveyed 43 percent of builders who said they were pursuing land acquisition “at full speed,” while 53 percent are moving cautiously. As land demand increases, so do prices. According to 40% of builders surveyed, land prices have increased.
Sullivan stated that affordability is becoming a greater concern for home builders. Consumer confidence, affordability of new homes, and economic uncertainty are all ranked as the top three concerns for builders. In October, 71% said that they had not raised prices, and an additional 13% had lowered the base price.
He noted that “flex dollars, money for closing costs and mortgage rate buydowns [have been effective incentives].” The builders target the sweet spot for buydowns, which is between mid-5 and mid-6.