New home demand continued to improve through March on the heels of:
- significant price discounts in the last half of 2022 and
- robust sales in January and February.
Given the economic uncertainty, quickly changing consumer sentiment, and historically poor new home affordability, we are watching for signs that this momentum may be a head fake.
So much coverage on housing shows year-over-year (YOY) numbers but doesn’t consider long-term fundamentals and trends. Let’s look at both.
The Short Term
Home builders sold 3.5 homes per community in March 2023, which was 20% above the typical 2.9 net sales per community seasonal average from March 2013 to March 2019.
The lack of resale supply has clearly helped home builders, as many would-be sellers decided to either:
- stay in place as they are locked into below-market mortgage rates (sometimes sub-3%) or
- rent their home and enjoy the positive cash flow while they lease or buy another home.
Here are a few home builder quotes from our monthly survey:
- Austin, TX: “Sales were solid across all products in March, but definitely a slight downtick from the strong sales paces seen in January.”
- Orange County, CA: “Price adjustments have found a market that is still undersupplied. Failing to re-price means you aren’t in the game.”
- Philadelphia, PA: “Sales have remained strong in the first three months of this year.”
The Long Term
Housing costs in relation to incomes have historically boomed and busted, as shown in the chart below. We expect a correction close to the 30.6% norm sometime in the future through a combination of rising incomes, falling home prices, and falling mortgage rates. New home affordability is closer to its historical norm since home builders have already lowered housing costs for new home buyers by dropping prices and buying down the mortgage rates.
Builders are bridging the affordability gap. Builders are more inclined to adjust prices versus resale home sellers to meet the market, drive demand back to their sales offices, and move homes off their balance sheet. Most are offering incentives that reduce the monthly payment, including closing costs, mortgage rate buydowns, and base price reductions. These incentives, particularly mortgage rate buydowns, remain a key sales advantage over the resale market and should continue with rates still elevated as long as forward commitments purchased by the builders remain available and not overly cost prohibitive.
Our consultants and survey leaders also inform us that consumers are becoming more comfortable with higher mortgage rates.
Our Conclusion
How sustainable is the positive momentum?
- The economy, particularly the job market, has always played a significant role in housing demand. The labor market remains strong as job and wage growth continue supporting homebuying activity. However, recent interest rate hikes have yet to work their way through the economy, resulting in less housing demand.
- The increased banking sector distress will likely only exacerbate the economic slowdown. We might get lucky and have inflation return to normal without significant job losses, but that would be unprecedented — at least in our careers.
Enjoy the short term while it lasts. Affordability has always returned to normal levels in the past, and we expect it to return to normal levels in the future.
