- Homebuilder sentiment plunged in July to contractionary levels, signaling a housing market downturn.
- With mortgage rates dipping and home sales slowing, buyers finally have a chance to snag a good deal.
- The opportunity won't last long, as more rate hikes — and higher mortgage rates — are coming.
The housing market of 2020 has completely flipped.
The government aid issued at the start of the coronavirus pandemic sparked an unprecedented home-buying bonanza. Record-low mortgage rates made homes significantly more affordable, and Americans flocked from densely packed cities to suburbs and exurbs. The few homes made available were quickly bid above their listing price and sold in just a few days. Buying a home quickly became a fantasy for those without the time, energy, and considerable cash needed to compete in the white-hot market.
But pandemic-era mortgage deals are over — and it has caused the housing frenzy to die down.
In just a few months, home sales have slowed dramatically and contractor sentiment has cratered. The National Association of Home Builders and Wells Fargo Housing Market Index — which measures homebuilder confidence — tumbled in July marking the first time since May 2020 that homebuilders see the sector in a recession.
The slump hints at a power shift in the housing market. Builders are no longer guaranteed the easy profits they enjoyed through the recent moving boom. And despite still-high prices, buyers are clawing back some of the power they lacked over the past two years. With mortgage rates dipping, inventory rebounding, and home sales slowing to multi-year lows, prospective homebuyers have a fleeting chance to snag a deal while they're still around.
The housing sector's slump opens the door for sidelined buyers
The downturn in builder sentiment is attributed to higher construction costs that have made it more difficult for homebuilders to operate — and ultimately build more homes.
"Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders," Jerry Konter, chairman with NAHB, said in a statement, adding that prices are also deterring homebuyers from taking to the market.
As inflation continues to wreak havoc on the economy, building material prices have climbed by 20.4% since 2021 and by 31.3% since January 2020. Increases have added as much as $14,000 to the construction costs of the average newly built single-family home.
The uptick has led to a slowdown in housing construction.
In July, residential homebuilding fell to its slowest rate since February 2021. Falling for the third consecutive month, housing starts declined 9.6% to an annualized rate of 1.4 million units, according to the Census Bureau.
However, despite the slowdown in new home construction, housing inventory is up as homes stay longer on the market — but that does not mean homeownership has become more affordable. In July, the national median list price increased 7% year-over-year to an astounding $412,739.
With fewer affordable homes available and inflation and interest rate hikes driving up lending costs, demand is faltering in the real estate market. As more buyers put their homeownership dreams on pause, it's given way to a larger shift in the housing sector. Determined buyers who have the money to pay for a still-expensive home may have an easier time now than a few months ago, but it's likely to be a limited window of opportunity.
In a reversal from 2021, buyers are now backing out of more deals as they regain leverage due to waning demand. Data from real estate brokerage Redfin shows that about 16.1% of home-purchase agreements fell through in July — marking the highest percentage on record with the exception of March and April 2020, a time when the onset of the coronavirus nearly brought the housing market to its knees.
The pivot separates the housing sector from the rest of the economy. The recovery from the coronavirus recession has held strong through 2022 despite slowing from last year's rapid pace of growth. July alone saw inflation broadly cool, job creation double economist forecasts, and wages climb at a historically strong pace. Surveys of business managers signaled both the services and goods-producing industries expect to keep growing in the near term.
The housing market was the sole bright spot in the early days of the pandemic as lockdowns and virus fears choked off economic activity. Now the opposite is true, and the path forward will likely escalate the housing sector's downturn.
Mortgage rates are down, but they won't stay that way
The Federal Reserve has already pulled away much of the aid that powered the housing boom. Several larger-than-usual interest rate hikes have lifted mortgage rates at the fastest pace in decades. The average rate on a 30-year fixed-rate mortgage soared more than two percentage points — to 5.81% from 3.11% — between January and June.
The weeks since have offered some relief. Expectations for a slower rate-hike cycle have pulled mortgage rates lower. The average 30-year mortgage rate now stands at 5.13%, leaving prospective buyers with a better deal than they would've seen just a few weeks ago.
The slump isn't likely to last, however. Investors already expect another half percentage point increase in the benchmark rate when policymakers meet in September, and Fed officials projected in June that the rate will climb to 3.5% from its current 2.5% by the end of the year. As the benchmark climbs, mortgage rates are practically guaranteed to follow.
Officials have already hinted that, despite signs that inflation peaked in June, they aren't done raising rates. The hiking cycle is "nowhere near almost done," San Francisco Fed President Mary Daly said in an August 2 interview with CNBC's Jon Fortt, adding that forecasts of looming rate cuts are "a puzzle to me."
Continued tightening and even-higher mortgage rates will put even more pressure on home prices. It could mean that the window of opportunity is slowly closing for prospective buyers hoping to lock in a good purchase deal.
The good news for buyers is that the Fed's next rate hike won't arrive for another month, when the Federal Open Market Committee meets on September 21. Until then, buyers still have the chance to take advantage of slightly lower mortgage rates and a market that's swinging in their favor.