New home sales drop as spiking mortgage rates keep buyers on the sidelines

Mortgage

Builders warned of a slowdown in home sales. And they were right – except the numbers are even worse than expected.

Sales of newly built homes dropped 5.5 percent in September compared with August, and were 13 percent lower compared with a year ago, according to the U.S. Census. This was well below predictions, even with higher rates factored in.

The census number is key because it is based on signed contracts in September, not closings as existing home sales from the National Association of Realtors are. The census numbers measure buyers out shopping for homes in September, already seeing higher rates and deciding if they can still afford to make the deal. Clearly fewer could.

September’s sales level of 553,000 annualized is the worst since December 2016. The three-month sales average has fallen to 580,000, compared with the six-month average of 607,000 and the 12-month average of 631,000. Some will blame hurricanes in the South for the weakness, but sales in the Northeast fell to their worst level since 2015, and sales in the West, where prices are highest, fell harder than the South. Part of that may be new tax laws reducing deductions for state and local taxes. The analysts are not sugarcoating it.

“This number really sucked,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, noting that August’s read was also revised lower. “Anyone watching home builder stocks or watching the data all year should not be surprised but its’s clear this important area of the US economy, highly sensitive to price and rates, has obviously slowed sharply.”

Affordability has been weakening all year, as home prices overheated due to a shortage of houses for sale. But now supply is rising for both existing and newly built homes. In fact, September’s supply for the builders came in at 7.1 months, which is leaning toward an oversupply. The supply of existing homes for sale has been rising on an annual basis for three months.

Rising rates, home prices putting pressure on housing affordability

 

Mortgage rates began their climb at the start of September and are now about a full percentage point higher than they were a year ago, now around 5 percent on the 30-year fixed. Mortgage rates also spiked in the summer of 2013, during the so-called taper tantrum when the Federal Reserve indicated it would start raising rates and stop pouring money into mortgage-backed securities.

Home sales also fell then, but rates came back down quickly, reversing the hit. That is unlikely to be the case now, as rates are expected to move even higher next year. The reaction among buyers will likely be longer term, at least until home prices cool.

“New home sales fell in September as rising prices and mortgage rates knocked out some buyers and spooked others into waiting to see if mortgage rates reverse or prices decline — even though both of these outcomes are unlikely,” said Danielle Hale, chief economist at Realtor.com. “Instead of taking advantage of reduced competition in the fall, buyers seem to be hibernating, marking an earlier end to the homebuying season than we’ve seen in recent hotly competitive years.”

Builders have not been aggressive at increasing production, despite being well below historically normal levels of activity. As the winter months approach, and buyer sentiment chills further, they could even pull back from their small gains. Miami-based Lennar recently lowered its guidance, citing weaker demand, and PulteGroup’s CEO, Ryan Marshall, noted that buyer concerns around affordability and rising mortgage rates appear to have impacted near-term market dynamics. He did say demand still appeared strong, but demand may not outweigh affordability, especially if the economy weakens.

Builders can read the early signs of a cooling housing market as well as anyone — including a slowing in home value growth, rising mortgage rates and an uptick in price cuts,” said Aaron Terrazas, senior economist at Zillow. “With an increasingly cloudy economic outlook over the next two years, builders may be growing weary of putting sticks in the ground that won’t be delivered to buyers for several months’ time … having only barely recovered from the last downturn, no one is eager to be swept away in the next economic storm brewing just beyond the horizon.

Other indicators are just as bleak. Mortgage applications to purchase a home are now flat compared with a year ago, according to the Mortgage Bankers Association, and may move lower in the coming weeks, if interest rates don’t fall back in a meaningful way.

Even home remodeling is expected to soften next year, as higher interest rates hit homebuyers and homeowners alike. That could take a bite out of earnings at remodeling retailers like Home Depot, Lowes and Masco.

“Rising mortgage interest rates and flat home sales activity around much of the country are expected to pinch otherwise very strong growth in homeowner remodeling spending moving forward,” said Chris Herbert, managing director of the Joint Center for Housing Studies. “Low for-sale inventories are presenting a headwind because home sales tend to spur investments in remodeling and repair both before a sale and in the years following.”

[“source=forbes]

Written by Loknath Das