The US housing market is beginning to suffer under rising interest rates.
Rick Palacios, Jr., director of research at John Burns Real Estate Consulting recently offered some highlights from his firm’s most recent survey of homebuilders.
One builder in Greenville, South Carolina said, “Traffic has slowed from red hot. Feels different for sure, but it’s more like a normal market.”
Another builder in Charlotte said, “This recession is looking like and feeling like a big long five year depression.”
Palacios felt the June survey highlighted three primary issues. First, more new homebuyers were canceling their purchase agreements. Second, price cuts are becoming widespread as demand drops. And finally, falling demand is beginning to produce a reduction in construction costs.
Survey data from Fannie Mae showed that potential homebuyer sentiment has hit the lowest point since 2014. Meanwhile data released last month on new and existing home sales showed a continuing slowdown in the housing market. Even though last week, mortgages had their largest weekly drop since 2008, the average rate on a 30-year fixed rate mortgage is still the highest it has been since 2009.
Although some potential homebuyers may see a cooling market as beneficial to them, the truth is the market is slowing because it has become more expensive to buy a home as interest rates have risen. Although Jerome Powell has described the housing market as undergoing a reset, experts have noted that it is, “a bit more than that.”
With institutional investors moving into the space and purchasing homes as investments to accrue appreciation as they rent them out, and continued limited inventories, prices are not dropping significantly, even as the costs of borrowing are increasing.
Economist Ed Leamer once argued in a paper that housing is the business cycle, and housing downturns are primarily expressed in drops in volume.
Leamer wrote, “For GDP and for employment, it’s the volume that matters… With the decline in sales volume comes a like decline in jobs in construction, finance and real estate brokerages.”
If he is correct, this slowdown in the housing market may presage something larger for the whole economy.
