Jerry Konter, NAHB, says future sales will drop! New Construction

July 21, 2022

Jerry Konter, NAHB, says future sales will drop! New Construction

I want to start this by going into “What is a housing bubble?”

I’ve gone over this before, multiple times, but I’ll answer it again for everyone who is still freaking out about a housing bubble or a housing crash.

According to Investopedia, “A housing bubble, or real estate bubble, is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand in the face of limited supply, which takes a relatively extended period of time to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices—and the bubble bursts.”

Housing Market Index: Homebuilder Confidence drops

Now, let’s talk about the housing market index.

According to Forbes, the NAHB reported on Monday that, “Home builder confidence plunged to a two-year low in July as high inflation and supply chain constraints prompted many builders to halt construction on homes.”.

They are saying that, after the pandemic home-buying craze, it is the “latest sign the housing market is due for a steep turnaround.”

The article shares a lot of great information.

“In a statement explaining the battered sentiment, NAHB Chair Jerry Konter said production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction, as the cost of land, construction and financing exceed a home’s market value in some cases,” according to Forbes.

“Also hurting confidence, increased interest rates have driven up the cost of new mortgages by hundreds of dollars each month, on average, ‘dramatically slowing sales and buyer traffic,’ the NAHB said.” (Source: Forbes)

And it is the increased interest rates that have been really driving everything where we are at right now.

The article also talks about an email exchange between this guy named Ian Shepherdson, the Chief Economist at Pantheon Macro, and Forbes magazine. Shepherdson says, “Confidence has ‘further to fall’” and that there is a meltdown about to happen.

“This is a meltdown,” says Shepherdson, noting home prices should soon start to drop and warning: “Pretty soon, anyone who has bought a home in recent months will be sitting on a loss.” (Source: Forbes)

This is because, in 2006, people who bought homes that year found their homes were worth a lot less the next year.

What does "normal" look like?

Fred tracks a lot of housing data, including what a normal market looks like in terms of housing supply. In a neutral market, the average is six months of inventory. If you look at the data, we entered the year with 5.6 months supply, and it shot up to 8.3 in April 2022, around the time interest rates spiked. Then in May 2022, it went down to 7.7 months, which is not too far over the normal average.

“Bubbly” Markets and Migration Patterns

Let’s get into what Fortune magazine calls a “bubbly” market. This article is called “These bubbly housing markets—including Boise and Phoenix—already got their home price ‘top’ blown off.”

We’ve been talking about Boise and Phoenix for a while now, and these are among the markets we have to keep a close eye on.

According to Fortune, “…that Boise honeymoon is over. While spiking mortgage rates have pushed the overall U.S. housing market into a slowdown, it has delivered a particularly hard blow to the Boise housing market. That has seen both Boise home sales plummet—down 28% on a year-over-year basis—and inventory levels surge—up 161% this year. It's also chipping away at home values.”

We talked about how, in some places where people are buying, homes may be worth less in a few months.

“According to Zillow, the median Boise home sale price fell 3.5% in June,” the article continues. “The downward slide in Boise has only just begun. That's according to Rick Palacios Jr., head of research at John Burns Real Estate Consulting.”

Fortune also quotes Palacios, saying: "You could make a strong case that in a lot of housing markets the last 10% of home price appreciation was purely aspirational and irrational, and that'll come off the top really fast. That's exactly what we're all seeing right now."

But mom-and-pop landlords and institutional investors also helped push those markets in places like Boise, Austin, and Phoenix too high. That is according to John Wake, an independent real estate analyst over at Phoenix who Fortune also interviewed.

It is backed up by studies on single-family home sales from Harvard researchers and data analysis from all home sales by Redfin.

In a different article by Fortune, it says, “In the first quarter of 2022, investors made up a staggering 33.1% of home sales in Atlanta. Not far behind were Jacksonville (32.3%), Charlotte (32.3%), Phoenix (29.0%), and Miami (28.2%). Those same markets are also among the nation’s most "overvalued" housing markets that are at risk of seeing a home price decline, according to Moody’s Analytics.”

“According to Moody's Analytics, U.S. home prices are set to flatline by this time next year. Meanwhile, significantly ‘overvalued’ housing markets like Boise and Austin are headed for a 5% to 10% trimming over the coming year,” Fortune says.

Real estate is going to be very unequal in the next few months, even going into 2023. One thing that is very clear is that real estate is not for everyone. Buying real estate is becoming unaffordable for a large number of people. But if we dig deep into it, we find that there is other data that some people just miss.

People are still moving. Millennials want to buy a home; they still want to live in a home that they own. They are still moving—for a lot of people, the American dream is still real estate. You can see that clearly in this article by Redfin titled “Migration Hotspots Have the Highest Inflation Rates.”

They provide a graph showing the correlation between the high influx of people migrating into an area and the rate of inflation in those areas. And the metros where the most people moved into, especially during the pandemic, have higher inflation compared to other areas where people moved out. That is why Boise, Austin, Phoenix, and all those areas often mentioned in the news are places you have to watch out for in real estate.

So, what’s actually happening?

So, it might not be a crash. In fact, if we look at data my friend Mike Simonsen over at Altos Research put out on Twitter, of the available inventory of homes that are active resales on the MLS—not new construction—we are just at 508,716 homes. Still, significantly less than where we were back in July of 2015, which was around 1.18 million homes.

He also has data (week-old data) of projected inventory by the end of 2022, and Mike says in his Tweet, “On our way to start 2023 with approx. 535,000 homes available. Buyers will have more selection, but not a lot.”

When you start putting all the data together, there are still a massive number of homes that aren’t available for a lot of people that want to buy them.

A lot of people also bring up price reductions, and we know it is because interest rates rose, and everybody jumped in wanting to sell their homes, especially during the summer.

According to Altos Research, price reductions for 2022 have climbed up to 33.3%, and it will probably go up higher than where it peaked back in 2018 (37.2%) before the trajectory slows down by the end of the year. The point is that price reductions are going to happen and they are going to increase, but here’s the thing: the demand is what we’re not paying attention to as much.

Dave Ramsey also says in one of his videos, “[For] supply, there is a shortage of used inventory. Remember: 3.6 [million] versus 800,000 for sale. Home starts are down—from 2.1 million, down to 1.38 million. And foreclosures have been non-existent now. They’re barely starting to come back. Then let’s look at the demand against that supply. There are 5 million more millennial buyers in their mid-30s. There are 12 million more overall householders, and investors are buying 1 out of every 4 houses that are sold. All of that is a pressure against the shortage—That’s going to tell you that we’re not going to see a crash in housing prices. This looks nothing like 2008.”

What’s next?

Fox Business did an interview recently, about homebuilder sentiment, which we talked about at the beginning with the housing market index.

The NAHB CEO is also saying that we have a shortage, regardless of where they are at and whether in some cases have “overbuilt” in some areas, there are still a lot of places that have a shortage of supply. Why? Because they never got to it.

He says, “Well, there is still a serious lack of housing. We’re about a million housing units short to keep our markets in equilibrium, and certainly, we’re not going to do anything to help correct that problem now. Builders are slowing down. They’re not going to build if they see continuous signs of an impending recession.”

That means builders are going to stop building as many homes as they are building now. That creates even more demand because there is less supply. 

Remember, the real estate construction and new home sales are not targeting the people that could afford this a long time ago. That’s a whole different group of people.

Those people that are projecting a crash—that’s just speculation. I want you to use the data to make the proper adjustments. Price reductions are happening. Are prices going to go lower in some areas? Yes, it is. But a crash? Nationally, it is far from happening. There is no data indicating one. But in some areas, like Boise, Phoenix, and other parts of Texas, it might get a little rougher.

As you start looking at everything that’s happening, know that the government’s going to do their best to put their foot in everything they can. The Fed looks like they are going to raise rates by a whole percentage point, but don’t freak out. Because whenever there are fears of a recession, investors buy into the 10-year Treasury bond, and what happens is that, if enough people buy it, it is tied to the mortgage rates, and the mortgage rates go down. A lot of people miss that and make stuff up because they’re scared.

Pay attention to what is happening right now. If it is time to buy for you, buy it. If it’s not, don’t. But don’t lead with fear.