The majority of 2023 has been categorized as the tale of two housing markets with the existing-home market experiencing a different reality than the new-home market.
The new-home market has gained market share and benefited from limited resale inventory, the lock-in effect, and the ability to offer rate buydowns on high mortgage rates. However, qualitatively, October felt like “an inflection point in the new-home market,” Zonda chief economist Ali Wolf said during the most recent National Housing Market Update Webinar.
According to a survey of builders conducted by Zonda, 64% of respondents said demand was slower than expected in October. Notably, 32% of respondents said the slower demand is a cause for concern. While seasonality is typically present in September and October, Wolf said the current new-home market can be defined as “seasonality plus.”
“We are experiencing true seasonality for the first time in three or four years. But we don’t think it’s just seasonality. We think it’s a little bit more pronounced with some of the feedback that we’re getting,” Wolf said.
She said builders are expressing velocity has “all but died out” in the market. Additionally, many entry-level buyers remain priced out, while move-up buyers are “spooked” by market dynamics.
“Similar to September, October data is still above where we were last year in most markets. But you are seeing a little bit more of a pronounced seasonal pullback than you would expect this time of year,” Wolf said.
Consumers and the Economy
While the housing market has potentially reached an inflection point, the overall economy remains resilient. In the third quarter, gross domestic product (GDP) had a “blockbuster” report, growing nearly 5% on an annual basis. Wolf said it was largely driven by continued growth in consumer spending for goods and services.
“We got to a point that people had excess savings, and that excess savings was being spent in the economy that is part of what fueled our inflation numbers. For most households, that excess savings has now been depleted with the exception of the highest-income households,” Wolf said.
She added while consumer spending remains elevated, savings rates are much lower than pre-pandemic levels and credit card balances are increasing. In addition, many consumers with student loans face those payments coming back online, which could impact income-to-debt ratios and decisions related to the housing market. Wolf said the combination of loans, broader spending in the overall economy, and some consumers defaulting on loans provides an interesting backdrop for the Federal Reserve, which has elected to pause interest rate hikes for its previous two meetings.
Looking at the Federal Reserve’s dual mandate of maximum employment and price stability, the labor market has averaged gains of 240,000 jobs each month this year, moving in the right direction but still elevated compared with pre-pandemic levels. Inflation has also cooled to between 3% and 5% from its high of 9% in 2022.
“Does the labor market continue to cool? Does inflation continue to cool? That’s going to drive whether or not [the Fed] continues to pause or, if either at the end of this year or into the early parts of next year, they may feel the need to do one more hike,” she noted.
Wolf said understanding the overall economic backdrop is important to the housing industry “because there’s a lot of counterintuitive things going on.”
“We’re in an environment today where good news coming out of the economy is actually bad news for our industry, and bad news is actually good news for our industry,” Wolf said. “We saw it at the beginning of October; we got this really strong jobs report, and we saw that interest rates had gone up. That jobs report plus the GDP report changed investor sentiment [too].”
Housing Market Update
Affordability shocks continue to impact sales in the housing market, most notably existing-home sales. As mortgage rates neared 8% in October, the monthly mortgage payment in many major markets was 60% higher than in January 2022.
“We have seen this low resell inventory funnel people into the new-home market. It’s not only the fact that resale inventory is limited, it’s also that it’s aging and expensive,” Wolf said. “Normally, new homes are more expensive than existing [homes]. We’ve seen that the price spread has narrowed.”
However, despite the dynamics supporting the new-home market, builders are sharing the impacts of the “seasonality plus” on the ground. Tim Sullivan chief advisory officer for Zonda, said the phrases “scarce land,” “expensive and undersupplied,” “challenging cost environment,” “price sensitive,” “cautious,” and “slowing [and] competitive” are common among builders surveyed by Zonda.
Builders remain enthusiastic about land acquisition, according to Sullivan, but land is becoming more expensive. Forty-three percent of builders surveyed by Zonda reported pursuing land acquisition at a “full speed ahead” pace, while 53% are cautiously moving forward. With increased demand for land, prices are moving higher as well, with 40% of surveyed builders reporting land prices are increasing.
Sullivan said affordability is also becoming a bigger concern for builders, with consumer confidence, new-home affordability, and general economic uncertainty all ranking as a biggest worry for home builders. As a result, 71% of builders said they did not raise prices in October, while an additional 13% lowered base prices.
“Mortgage rate buydowns, funds toward closing costs, and flex dollars [have been effective incentives],” he noted. “The sweet spot [for buydowns] is the mid-5 to mid-6, that’s where the builders are targeting.”
