Although inflation has started to subside, it is still up between 6% and 8% compared to last year, and the overall economy has not yet returned to a healthier level. Over the most recent of Zonda Housing Market Updatechief economist Ali Wolf says Zonda’s expectation is for the economy to fall into a recession, which includes nationwide job losses, in 2023.
“Although we have inflation numbers that look a little better, Federal Reserve governors don’t want our financial markets to rebound completely that quickly, because from the Federal Reserve’s perspective, we still have a long way to go. to go until we’re at a point where the economy is back in control again and back to something that’s healthier,” says Wolf.
As headline inflation begins to ease, several major components of inflation, including basic living expenses such as transportation, food and beverage, and housing, have high inflation levels of a year to year. Housing is a big part of the inflation data, and inflation in the sector remains 8% higher year over year. While the data suggests rent growth is starting to slow month-to-month, Wolf says the housing component of inflation typically lags changes in the housing-for-sale market by about a year. .
“If we want the Federal Reserve to say ‘we have to quit,’ they won’t until we see that overall level. [of the shelter component] come down,” said Wolf. “Going into the first and second quarters of next year, we could still reassess [the shelter inflation component] numbers and recheck to see if we see enough cooling effect.
Affordability issues
Although cooling inflation may put downward pressure on treasury bill and 10-year mortgage rates, affordability will remain a major concern in the housing market. Wolf says the combination of appreciating home prices and rising mortgage rates has contributed to the 80% increase in the national average monthly payment year-to-date. Even if there is mortgage rate relief, a 5% mortgage rate would still lead to a 45% increase in the average monthly payment since the start of the year.
“At the end of the day, when you look at the fundamental problem, that means affordability will still be an issue with 6% rates, but not as dramatic as what we’ve seen with 7% rates,” says Wolf. .
A period of lower rates, linked to tougher economic conditions and a potential recession, may not facilitate affordability due to expected job losses. Based on historical precedents for previous recessions, the number of jobs is expected to remain down for between six and 24 months, while the unemployment rate generally increases by 1.6% six months after the official start of a recession and of 2 percentage points after 18 months.
“The Federal Reserve would rather see the unemployment rate go up – they said they could tolerate a rate in the 5’s versus the 3’s because getting inflation under control is the number one issue,” Wolf said. “Not getting [inflation] under control is more disastrous than seeing the unemployment rate go from 3% to 5%”.
Sales versus historical performance
Existing home sales are at their lowest level since 2012. The drop in sales isn’t just inventory-related, as 2020 and 2021 both saw lower inventory, but higher overall transaction counts. Wolf says the decline in existing sales is a combination of the supply picture and buyers reacting to affordability and overall confidence. Supply and demand factors are also contributing to the contraction in new home sales, which are at their lowest level since 2016, according to data from Zonda. Some markets, including Miami, Los Angeles and Boston, remained more stable in terms of overall new sales volume and are operating at levels comparable to 2019, while markets such as Las Vegas, Phoenix, Dallas, San Antonio, Denver and Florida Orlando, Jacksonville and Tampa show performance comparable to 2016 or earlier. When analyzing markets based on average sell rate versus historical averages, Denver; Vegas; Austin, TX; Phoenix; and Riverside, Calif., are also showing performance comparable to 2016 or earlier.
Although there are regional differences, Wolf says the eastern part of the United States “continues to outperform” the western part of the country. The Mountain, Southwest and West markets, which have become the slowest markets nationally, have seen the payment-to-revenue ratio become the most lopsided, Wolf says. Markets that have seen high levels of price appreciation, migration and job growth have seen potential buyers “pushed to their limits,” says Wolf.
Housing statistics in real time: price drops and high cancellation rates
According to the most recent survey of Zonda division presidents, 81% of builders said they plan to significantly or slightly reduce housing starts in response to the market, while nearly 90% said they expect a slowdown in housing starts in 2023. According to the survey, 40% of builders said it takes between eight and 10 months to take on a home from start to finish, a sign of an improving supply chain, as the majority of builders reported 15 months or more a year ago. As for the slowdown in starts, Zonda Senior Managing Director Tim Sullivan says many builders remain “cautious” about their land strategy going forward.
“Most builders are taking a break from trading on the periphery, but when it comes to the core markets they are in, they are careful. But, there is still concern that land prices are too rigid, and there needs to be a restructuring of transactions,” Sullivan said.
While many builders reported price increases as recently as August 2021 and January 2022, 40% of builders in November reported lower prices. Sullivan says price drops are most common in the Southwest and West regions, while price drops are least common in the Northeast region.
“The smallest [price] the cuts haven’t really caught consumers’ attention, whereas a 7% or 10% cut automatically grabs a consumer’s attention. We’ve seen that in almost every market,” Sullivan says.
The cancellation rate for builders nationwide was over 20% in October, according to Zonda. In addition to experiencing the most price adjustments, builders in the Southwest and West also reported the highest cancellation rates, Sullivan said. Cancellations are highest among interest-sensitive buyers in the entry and progression segments, while cancellations are lowest among investors and luxury buyers, typically less rate-sensitive spot buyers of interest. As recently as June, less than 30% of builders said it was difficult to resell a home after a cancellation; however, 53% of builders in November reported difficulty reselling homes after a cancellation.
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