This topic is interesting and a little scary for some of you, so pay attention. There’s a lot of bubble talk and a lot of crash talk. I still think that we are in a pretty safe market, but there are some things that we need to watch.
In the news recently, they say there’s been a big drop in home sales. Inventory is also brought up, which I feel is an issue that consistently pops up, and yet, a lot of people still fail to understand. That, or they ignore its implications in the housing market–which is a pretty big one, by the way.
There are also some leading indicators I want to talk about as well.
Let’s dive right into it.
According to an article by CNBC, “Sales of newly built homes dropped 16.6% in April from March, far more than expected, and were down 26.9% from April 2021, according to the U.S. Census.”
That’s important because it is usually an indicator of where the market is heading, and according to the data, it’s getting a little challenging.
George Ratiu, Senior Economist at Realtor.com, says that over the past two years, new construction has gained favor from potential homebuyers because of the shortage of existing homes for sale, but with the recent hike in home costs, a lot of these potential homebuyers are being priced out of the market.
In the article, he says, “‘The market for new homes is mirroring broader real estate trends, as rising inflation is taking a bigger chunk out of Americans’ paychecks and surging borrowing costs are compressing homebuyers’ budgets.’”
And an article from LinkedIn says, “Existing Home Sales, which measure closings on existing homes, showed that sales were down 2.4% in April at a 5.61 million unit annualized pace. […] On a year-over-year basis, sales were only down 5.9%, which is still quite strong considering higher rates, higher home prices, and tight inventory.”
The drop in home sales is more of an affordability issue caused by inflation, the increase in interest rates, and in some cases, because of recent unemployment, which we will talk about more in detail later.
I keep hearing lately that there is a massive oversupply of newly built homes. This is what CNBC says about it: “A stark pullback in demand, and not over construction, is hitting the market. Housing starts have actually been falling over the past few months. Slower sales caused the inventory of newly built homes to jump sharply to a nine-month supply.”
That’s a massive supply, because six months is the usual average.
According to this LinkedIn article, however, “There were 1.03 million homes available for sale at the end of April, up 10.8% from March. However, this equates to just a 2.2-month supply of homes. Six months is considered a balanced market, so this data speaks to the ongoing imbalance of supply and demand, which should continue to be supportive of home prices.”
This is the argument I have with everybody.
Statistics show that by the end of April, there was only 2.2 months of supply available in the market. If there is still a lack of inventory, and the demand is still there despite the interest rate of 5.5%, then how can the market crash?
It all comes back to supply and demand because it is key to this and any other market.
The LinkedIn article also talks about how builder confidence weakened but they are continuing expansion.
“The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, fell 8 points to 69 in May, coming in much worse than expectations. Looking at the components of the index, current sales conditions fell 8 points to 78, future sales expectations were down 10 points to 63, and buyer traffic declined 9 points to 52,” says the article.
Let me explain this to you. They showed a graphic of the housing market index in the article. Nationally, it is at 69. Last month, the index was at 77. This next month, it is probably going to be lower than the article mentioned.
Since December 2021, the Housing Market Index has been dropping slowly, but this 8-point difference from April to May has been the most significant drop yet.
Regionally, the Midwest is at 51, and anytime the index hits below 50, that means home builders are no longer in expansion territory (because the demand is not strong enough to require the production of new supply). They’re not moving forward with a lot of construction.
But, in the West, it’s 73, and in the South and the Northeast it's both 76.
This is also an important statistic to note.
“Builder sentiment is weakening as their material costs are still up 19% from last year, home prices and interest rates are higher, and labor issues and a backlog of homes to build remain, but demand is still there,” the article says.
Material costs for building homes are up. Guess who the builders are passing this cost on to? It’s you and me, the people who are buying homes. Or the consumer if you are a real estate agent.
This is the bottom line, according to the article. “Despite the monthly declines, overall housing starts and building permits were higher compared to April of last year. However, as noted above, one of the biggest issues is that builders are still facing challenges in completing homes. Single-family units completed were down 5.1% from March to April, showing that the backlog continues to grow for builders. There is no reason to go to permits when current inventory is not being consumed at a scheduled pace.”
Now, we see the builders hold on to all of this inventory, and it already showed that they have nine months’ worth of inventory in this new construction, and they are just slowing it down.
“There were 1.4 million households formed in March (on an annualized pace), which is historically a pretty strong level and above the average. At the same time, looking at last week’s housing starts report for April, there were 1.7 million total starts. This includes both single-family and multi-family places to buy or rent,” the article continues.
Of this number of homes, about 100,000 are destroyed due to aging or replacement. Subtract that and the 1.4 million household formations in March, you are looking at only about 200,000 homes that are going towards the undersupply.
At that rate, it is going to be a while before we catch up.
Freddie Mac forecasts that the current housing market is undersupplied by 3.8 million homes to meet demand, which would take about 19 years to reach a balance between supply and demand. And that is a high estimate.
And according to the article, “Even if we lower [Freddie Mac’s] estimate and are only undersupplied by 1 million homes, it would still take 5 years at the current pace to reach equilibrium.”
These are the things you need to look at.
When people tell you that the market is going to crash, there is often no foundation behind that reasoning.
Instead of believing them blindly, it is important to take a look at what is actually happening.
Let’s take a look at the jobless claims we’ve been hearing.
Over the last few weeks, all of a sudden, you start to see a small trend.
In an article from Trading Economics’ news stream, it says in the title, “US Jobless Claims Hit 16-Week High.” And if you go to the bottom of this, it says, “The 4-week moving average, which removes week-to-week volatility, was 199,500, an increase of 8,250 from the previous week's revised average.”
If we continue to see this, then we might start to see an issue with unemployment. Right now, it is too early to tell, so keep an eye on these things.
Everything that’s happening matters, with interest rates, labor, and the stock market, it’s all intertwined.
When I am looking at the new home builders, there’s a reason I’m looking at these leading indicators for you, so we can all get a better picture of where the housing market is heading.
Right now, all I see from the data I just showed you is that we are heading into a more equal market where demand and supply balance. We’re getting there.
In some markets, it has already started to slow down. We’re not seeing as many multiple offers as in other areas. We are not seeing any multiple offers, but there are still some markets that remain hot. There are still multiple offers and things are flying off the shelf.
It’s regional. Remember that.