It was the mortgage rates that finally brought the fever down. Their relentless rise has reached a level that has changed buyer behavior. Earlier this month, 30-year mortgage rates hit their highest level since 2009. Mortgage purchase applications fell to their lowest level since 2018. Inventory of unsold single-family homes, although ‘still well below pre-pandemic levels, is now rising on a yearly basis, according to Altos Research.
It still seems like a manageable change for home builders. Toll Brothers, an upscale residential construction company, reported strong earnings last week. On their conference call, they said the moderation in demand they’ve seen recently resembles the seasonal fluctuations they experienced before the pandemic. Their customers pay $75,000 non-refundable deposits when they place an order — a far cry from the low deposit days of the housing bubble of the mid-2000s — so their May cancellation rate isn’t significantly higher. different from the 1% rate they had in the previous quarter.
They have also been trying to replenish their inventory so that when customers come looking for homes, the wait is closer to the 9-10 months it has been historically, rather than the 15 months of last year. A slight slowdown that allows builders to focus on filling existing orders and replenishing inventory suits them.
For people looking to buy, there are three good reasons to wait. The first is that we are coming out of the most seasonal time of year. Even in a normal housing market, one would expect the supply of homes to increase and prices to stabilize over the next few months. In general, if you haven’t found what you want by Memorial Day, there’s no reason to buy a spot in a hurry.
The second is that for the first time since the pandemic, the market is softening. There will be more homes for sale in a month than today. The percentage of homes with price reductions, although still lower than normal, is increasing rapidly. If the economy experiences a soft landing rather than a hard landing, equity investors might regret waiting to buy, but housing moves slower and has a different dynamic. Whether it’s a soft landing or a hard landing, you have time to wait a bit to see which one it’s going to be.
The third reason is that with the overall economy showing signs of weakness, longer-term interest rates have actually declined in recent weeks, which is only just beginning to be reflected in mortgage rates. Mortgage rates fell to a one-month low this week – if the economy continues to deteriorate, the conversation about mortgage rates could shift from whether they will hit 6% to whether they will fall back below 5%.
My view on the housing market is that we are getting the rebalancing we knew we needed at the end of the year. Stocks are moving from historic lows to something closer to normal. Price growth should stabilize for some time, perhaps with some slight dips in the markets that have seen the strongest growth. But above-trend job and wage growth should keep things from getting too extreme. And there’s a good chance that mortgage rates will fall further from current levels as markets grow more confident in the Federal Reserve’s ability to rein in inflation.
The terms might not work exactly the way I expected, but it still makes sense for buyers to wait for more clarity. Economically sensitive stocks will surge before the economy stabilizes, but the housing market is not like that. A lot has changed in the past three months, and a month or two more could make an even bigger difference.
More other writers at Bloomberg Opinion:
Adjustable mortgage rush not the same as 2008: Alexis Leondis
Long Covid in real estate weighs on core inflation: John Authers
Soaring house prices freeze low incomes: Jonathan Levin
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.
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