While inflation has likely passed its peak level, the persistence of high inflation likely means the Federal Reserve will continue to take an aggressive approach to keep price stability in check. According to the Federal Reserve, requiring a restrictive policy stance is necessary to keep inflation under control, and even as some sectors—including housing—slow, historical records caution strongly against prematurely loosening policy. On Zonda’s National Housing Market Update webinar, chief economist Ali Wolf says the actions to increase short-term interest rates coupled with quantitative tightening, a contractionary monetary policy used to decrease the amount of money supply in the economy, are putting upward pressure on mortgage rates.
“What’s happening on the macro side, it doesn’t matter where you live across the country, higher interest rates will hit [all markets],” Wolf says. “As we look at this, though, not all consumers will react the same, not all markets look the same, and it depends on timing and how people are perceiving what is going on.”
Wolf says after the frenzied period earlier in 2022 where the housing market was ripe with bidding wars and escalating prices, there is some shock in the market, where rising monthly payments and mortgage rates have caused home buyers to become fearful of buying at the top of the market. Buyers now are looking for deals in the market, and many builders are beginning to cut prices. According to Zonda data, 30% of builders cut prices in August, while 64% have kept prices steady, compared with 40% of builders that were pushing prices by over $10,000 as recently as March. In addition to price cuts to boost demand, builders are also increasing incentives to entice buyers, Wolf says. Three-quarters of builders surveyed by Zonda in August reported increasing incentives, which includes mortgage rate buydowns, extended rate locks, options and upgrades, and closing costs.
Across buyer cohorts, Wolf says the entry-level and first-time market has been hit the hardest by rising mortgage rates. The group tends to rely more on income rather than accumulated wealth to make purchases, making changes to the monthly payment more significant barriers to homeownership.
Regional Housing Market Differences
Wolf says the regional differences in the housing market have become more apparent in recent months. During the webinar, Wolf dissected trends in sales rates, quick move-ins (QMI), and resale inventory, as well as monthly payment changes across several major metro markets in six regions across the country to illustrate how changes in the housing market are not uniform nationally.
In the Pacific region, sales rates relative to 2019 are not uniform. Some markets, including Los Angeles; Portland, Oregon; and San Diego, have sales rates above 2019 levels, while California’s Riverside, Sacramento, and San Francisco as well as Seattle are performing below 2019 sales levels.
Riverside and Sacramento, two metros that were popular relocation areas during the pandemic, are experiencing negative effects of escalating prices. QMI has increased relative to 2019 in the two metros, and units under construction are significantly higher on a year-over-year basis; however, resale inventory is significantly lower than 2019 levels. Conversely, Seattle and San Francisco show low levels of QMI relative to 2019 and total units under construction down compared with 2021.
The Rocky Mountain region has similar trends to the Pacific region, with metros posting sales rates down compared with both 2021 and 2019. However, units under construction in the region are up in the high double digits and triple digits compared with 2021 in Las Vegas, Denver, and Salt Lake City.
“[The Rocky Mountain] region is one of the highest in terms of having the highest percentage of projects that have incentives. I think that lines up with QMI relative to 2019, which is notably above where it was heading into the pandemic [in the three metros analyzed],” Wolf says. “The Mountain West and the Pacific region [have slowed the most] where we are seeing a bit more inventory, and we are seeing more incentives to move product.”
In the Southwest, Wolf says several markets have inventory build-ups, and base prices are adjusting as buyers and sellers attempt to determine the new market equilibrium. While many trends in sales performance in the Southwest are similar to the Pacific and Mountain West, metros in the region, including Austin and Phoenix, have resale inventory higher than 2019 levels.
While many Western and Southwestern metros are experiencing sales rates below 2019 levels, metros in the Midwest are performing either flat or above 2019 sales rate levels. In Chicago and Indianapolis, sales rates are 29% and 45% higher than 2019 levels, respectively. Metros in the region are also experiencing much higher levels of QMI, as many builders have been spec building at higher rates relative to other markets. Resale inventory across several major markets though, including Chicago, Indianapolis, Minneapolis, and Cincinnati, are down between 30% and 50% compared with 2019.
“As we looked at the Midwest, while it has gotten a little bit more expensive relative to itself, even people in the northern part of the Southeast region are thinking about moving to the Midwest region because of the value [proposition],” Wolf says.
The Southeast region has not seen housing demand slow as dramatically as other regions of the country, Wolf says. Many metros have sales rates that are either flat or above 2021 levels, and the region has sales rates consistently above 2019 levels. However, the region has a significant shortage of resale inventory, with many markets reporting resale inventory between 20% and 60% lower than 2019 levels.
“As we look at the Southeast, I think my biggest red flag is what we’re seeing in the monthly payment. [The region has] some of the biggest changes in monthly payments [since the end of 2021], and it seems like for now buyers have been able to absorb this,” Wolf says. “But that to me is a number that I’m watching as we move forward.”
The Northeast region is characterized by new-home inventory similar to 2019 levels and extremely constrained resale inventory. Builders in the region are offering incentives and price cuts to move product, but they also have the expectation that price changes in the medium term will not be too dramatic because of the overall tight inventory, Wolf says.
Real-Time Housing Statistics: Adjust, Protect, Educate
Zonda’s most recent division president survey indicates that the volume of gross contract sales is decreasing for a majority of builders, senior managing principal Tim Sullivan says. Similarly, builders report that demand is slower than expected and causing concern.
“We’ve got to adjust to the market, the price cuts are real in certain markets. We’ve got to protect the backlog, and we’ve got to educate the consumer that there are options out there. Buydowns work [for consumers], and price adjustments are helping,” says Sullivan, summarizing the sentiment from builders in the division president survey.
The biggest worries for builders in the current market are centered around market uncertainty and affordability concerns, Sullivan says. Rising mortgage rates are the top builder concern, followed by consumer confidence, new home affordability, inflation, and general economic uncertainty. He says builders can help consumer confidence by educating buyers on the value proposition of purchasing a long-term home in an area with strong school districts and access to services.
An increasing number of builders report plans of slowing starts both through the end of 2022 and into 2023, Sullivan says. Many builders are also reporting proceeding with caution relative to land acquisition. Almost a quarter of builders are reporting pausing land deals, 12% are reporting bidding lower on land, and only 6% of builders are reporting proceeding “full steam ahead” in terms of land acquisition.
“Being selective is where I see land acquisition continuing. Many deals are being delayed, and I think it’s legitimate for us to expect land to get softer in certain markets,” Sullivan says.
The next National Housing Market Update webinar will be Nov. 16 at 11 a.m. PT/2 p.m. ET.
