The American housing system is broken.
It’s bad for homebuyers and homebuilders; it’s even worse for renters.
To put it bluntly, the U.S. desperately needs more high-quality rental housing. A lot of it.
These are far different times than those of our grandparents who came home from WWII to go to college on the GI Bill and find affordable single-family homes to raise their new families in.
Today, homeownership still works for many – but doesn't work for many others, especially those who aren’t ready to settle down in one place or who don’t have an ample nest egg to tie up all their savings in.
Builders See a Housing Recession
And builder sentiment – for single-family homes anyway – has fallen into negative territory this month, as builders and buyers alike struggle with higher costs.
The National Association of Home Builders Housing Market Index dropped 6 points to 49 this month, its 8th straight monthly decline. Anything above 50 is considered positive; 49 is not.
Notably, NAHB chief economist Robert Dietz says, “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.”
The builders index hasn’t seen negative numbers since the start of the pandemic. Before that, it hadn’t seen negative territory since June 2014.
Of the index’s three components, current sales conditions dropped 7 points to 57, sales expectations in the next six months fell 2 points to 47 and buyer traffic fell 5 points to 32.
The biggest hurdle for buyers – like many renters – right now is affordability.
Home prices have been climbing since the start of the pandemic, and the average rate on the 30-year fixed mortgage, which had hit historic lows in early 2020, is almost double what it was at the start of this year.
Yes, home price growth has cooled somewhat in recent weeks, while mortgage rates have come down from their 6%ish highs.
But Deitz believes, “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.
The eternal optimist adds, however, that peaking or falling inflation and stabilizing long-term interest rates “will provide some stability for the demand-side of the market in the coming months.”
Pending home sales dropped for the 3rd straight month in August and the 7th drop of 2022.
It’s another sign that the Fed’s campaign to rein in the effects of high inflation appear to be sending a critical industry into recession. https://www.axios.com/2022/09/29/housing-affordability-income-sales-decline
According to the National Association of Realtors, 3 out of the 4 major regions across the country experienced month-over-month decreases in sales (the West saw a minor gain). All 4 regions saw double-digit declines.
The NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.0% to 88.4 in August. Year-over-year, pending transactions dwindled by 24.2%.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined.
The PHSI is a leading indicator for the housing sector, based on pending sales of existing homes.
A sale is pending when a contract has been signed, but the transaction has not closed (the sale usually is finalized within one or two months of signing).
According to NAR, pending contracts are considered good early indicators of upcoming sales closings.
Variations in the length of that process – from pending contract to closed sale – are caused by difficulties with buyers getting a mortgage, home inspection issues, or appraisal issues.
The index is based on a sample that covers about 40% of multiple listing service data each month.
In developing the model for the index over 20 years ago, it was shown that the level of monthly sales-contract activity matches the level of closed existing-home sales in the following two months.
Coincidentally, the volume of existing-home sales in 2001 fell in the range of 5.0-5.5 million, which is considered normal for the nation’s current population.