The current economic landscape is categorized by “seemingly contradictory” elements, according to Zonda chief economist Ali Wolf. During the latest COVID-19 Update webinar, Wolf shares that some elements, such as the “stellar” April jobs report, the low unemployment rate, 6% wage growth, and high inflation rates, flow together. However, GDP growth in the first quarter of 2022 contracted, and lots of “soft data,” gauging consumer sentiment and expectations, is beginning to trend more negative.
“If you look at consumers, some of the sentiment data, they don’t feel that great, whether it’s about the economy or about how much they’re paying every day,” Wolf says. “[Thinking] about the housing market, not too many people think now is a good time to buy.”
While inflation, as measured by the Consumer Price Index, decreased marginally from 8.5% year-over-year growth in March to 8.3% in April, there is still no inflationary relief yet, according to Wolf. After its first short-term interest rate increase in March, the Federal Reserve announced the second short-term rate increase in April, a 50-basis point increase aimed to combat high levels of inflation and help add relief to the overheating economy. While the short-term federal funds rate is up 75 basis points, mortgage rates are up more than 200 basis points, in part because “the market isn’t waiting for the Fed,” Wolf says.
The response on the ground has been varied, according to Zonda builder survey data. According to a survey conducted in mid-April, 30% of builder respondents reported demand was slower than expected. However, more than 60% of builders reported that demand was either on track with what was expected or remained stronger than expected.
“Builders are seeing different responses in terms of what’s going on with affordability and interest rates, and consumers are having different reactions to what’s happening,” Wolf says. “You have some buyers that are motivated by the market: Prices are up, inventory is up, and people have a fear of missing out. You also have some people looking at the market, thinking inflation is at 8.3% and costs are increasing, want[ing] to lock in the largest share of their monthly budget.”
Wolf says many buyers also are deterred in the current market, either by fear of buying at the top or by force due to rising affordability concerns. As a result of home price appreciation and changes in mortgage rates, monthly payments in many major metros, including Dallas and Austin, Texas; Las Vegas; Jacksonville and Tampa, Florida; and Raleigh, North Carolina, are up 40% since the end of 2021.
Wolf says while 30-year fixed-rate mortgages are nearing 6%, adjustable-rate mortgages (ARMs) only account for about 11% of outgoing loans, much lower than the 35% rate at the height of the last housing cycle.
“While nowhere near as high as the last cycle, we are seeing ARMs increase as people are trying to use them,” Wolf says. “ARMs are not inherently bad, but we do know that some of the problems associated with the last cycle [came] when the [ARM] payment reset and people found themselves unable to purchase.”
In part due to the rapid pace of monthly payment increases, 35% of builders surveyed by Zonda indicated that cancellations are increasing. Despite the increase, Wolf says there has generally been enough demand from prospective buyers that canceled homes ultimately are purchased.
Wolf says the increase in cancellations, coupled with rising monthly payments, a larger share of builders offering incentives, and many buyers on the margins deciding to opt out, suggest the market is reaching “an inflexion point.”
Price Appreciation and Buyer Cohorts
According to Zonda data, between 80% and 90% of actively selling communities across the country were raising prices as of March. Additionally, the mid-April builder survey found 84% of builders were raising prices month over month.
“As we have seen interest rates go up and as we have the demand pool come down, for now we still have more people that are willing to buy a home than homes that are available on the ground,” says Wolf.
Among buyer cohorts, move-up buyers, relocation buyers, and entry-level buyers remain the most active shoppers. However, the share of active entry-level of shoppers has decreased on a year-over-year basis since April 2021 as many prospective entry-level buyers are sensitive to interest rates.
Real-Time Housing Data
Zonda senior managing principal Tim Sullivan says builders are reporting that first-time buyer price points are showing the most interest rate stress while build and cycle times are becoming stretched. Most builders also continue to report they are capping sales, according to Zonda data, while interest rate changes are having differing impacts depending on buyer sentiment.
“Some buyers are still moving forward, particularly those that are locked into mortgages, but others are a little bit more afraid and looking to hold off,” Sullivan says. “We are also seeing some indications that sales are slowing.”
Sullivan says builders’ top concerns in the current environment are still centered around rising mortgage rates and costs. Additionally, a majority of builders are still reporting supply chain disruptions, labor shortages, land disruptions, and challenges related to government services.