Interest rates have been at their highest level in more than two decades. But that characterization is overly benign. Since the global financial crisis and then with the jarring effects of Covid-19, housing market participants have become accustomed to shockingly low mortgage rates. In other words, a 30-year fixed mortgage rate more than 7% feels much higher today than would have been the case as we turned the page on the millennium.
But with inflation data cooling in recent weeks, and with bond market investors concluding that the Federal Reserve is tightening monetary policy, mortgage rates have been edging lower. By November’s end, the 30-year fixed mortgage rate had dipped from the high-sevens to the low-sevens. While that move is inadequate to unlock the marketplace, it represents a hint of things to come.
For now, the market remains roughly frozen. Prospective buyers, many of them young and first-time, remain frustrated by a combination of low inventory, high prices, and unusually high mortgage rates by their standards. Meanwhile, prospective sellers largely remain content, living in homes associated with incredibly low mortgage rates that many acquired either through purchasing or refinancing during the pandemic. Among the most disenchanted economic participants are residential realtors, who are spending precious little time at settlement tables.
At the heart of realtor concerns is a lack of homes available for sale. According to Realtor.com data, in October, the number of homes available for sale was down 2% from the prior year. In both the Baltimore and Charlotte metropolitan areas, the number of homes actively listed for sale was down more than 11% on a year-ago basis. In Boston, the corresponding figure was -14%. In Los Angeles, it was -23%, in Phoenix -39%, and in Las Vegas -53%.
These dynamics are neatly reflected in data regarding pending home sales. In October, pending home sales fell 1.5% from an already depressed September. According to the National Association of Realtors, which began tracking this leading indicator in 2001, pending sales have been even worse than readings registered during the global financial and foreclosure crises. Pending sales were down nearly 9% from a year earlier.
Circumstances are not especially delightful for new homebuilders either. Many buyers often finance their purchases in whole or in part by selling their existing homes. But with so many owners sitting back with mortgage rates less than 3%, the appetite to transact has been dramatically diminished.
Nonetheless, life happens. Employment opportunities are secured in different cities. Grandchildren appear as if by magic. A move becomes necessary. That fact that precious few existing homes are available for sale supplies opportunities for builders of new homes.
According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, sales of new single-family homes in October 2023 stood at a seasonally adjusted annual rate of 679,000. While that was 5.6% below the revised September rate of 719,000, it was nearly 18% above October 2023’s estimate of 577,000.
In October 2023, median sales prices stood at $409,000, which is sharply lower than earlier in the year. For instance, two months prior, the median sales price stood at nearly $440,000. With the labor market stabilizing and certain construction input prices declining (e.g., softwood lumber), it may be that homebuilders are passing along a certain level of cost savings to purchasers to bolster transactional volume. The seasonally-adjusted estimate of new homes for sale in America stood at 439,000, which represents supply approaching eight months at the present sales rate.
With mortgage rates having likely peaked for the cycle and given a structural shortage of housing in America, many homebuilders spy opportunity. While authorizations for new residential construction have slowed from the peaks observed during the latter stages of 2021, as of August 2023, they remained higher than during any month between 2008 and the July 2019. Indeed, in part because of ongoing delays in completing and delivering homes, the number of housing units currently under construction continues to hover at its highest level since at least 1974 – in part the result of prior supply chain delays and a dearth of skilled workers.
These complicated dynamics have homebuilders aggressively strategizing. Builders like D.R. Horton are adopting cautious approaches for fiscal 2024. Jessica Hansen, Head of Investor Relations, notes several factors the company faces and states “As we look forward to the first quarter of fiscal 2024, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, the capital markets, and general economic conditions that may significantly impact our business.”
Despite elevated rates, D.R. Horton reported strong revenue and earnings for the last quarter of fiscal 2023, supported by demographic trends and a lack of available homes. Like many others, they have adjusted to higher rates by offering incentives including mortgage rate buydowns. D.R. Horton intends to continue using incentives, particularly rate buydowns, to maintain sales volumes and market share.
Stuart Miller, Executive Chairman and Co-Chief Executive Officer at Lennar, states in a press release, “Market conditions remained constructive for new homebuilders during our third quarter.” He highlighted the use of incentives to counterbalance rising interest rates. Miller added, “Our balance sheet has never been in a stronger position.”
That is important, because there will be a boom in new single-family construction at some point in the future. Accordingly, strong balance sheets will come in handy. Mortgage rates are poised to decline in 2024 and 2025. Once that occurs, the market will become far more active, with Millennials among others scrambling for homeownership during a period initially associated with scant inventory and rapid household formation.