ORIGINALLY PUBLISHED ON REDLEG FUNDING BLOG – ADDITIONAL COMMENTARY ADDED.
By Douglas Katz – 08/14/2022
Mortgage rates continue the upward trend slowing buyer activity, to include new construction.
Builders are reacting to market conditions with a lower confidence which has been the case for almost a year.
Inflation and other negative market conditions are pointing toward this concern for the foreseeable future.
It is no secret that the market has been volatile during the last few months. This volatility and negative indicators has begin to shake the confidence in the housing sector by buyers, sellers and all of those who make a living helping them. The most recent group to show waning optimism was the National Association of Home Builders who posted a 6% decrease in May. This was the eighth such drop in as many months and it represents another sobering data point communicating signs of a worse market in 2022 and possibly 2023.
The confidence contagion no doubt began with the rapid jump in mortgage rates several months ago decreasing the pool of buyers and marking their homes harder to sell. The rates increases have not ended and many projections are that they may not for some time. The mortgage market has experienced a 30% decrease since December 2021, so these fears are not unfounded. Additionally, many buyers are reticent to enter a longer term transactions like buying new construction which can take months more that buying an existing home. In response, many builders have needed to slash prices to stay ahead further market degradation.
Aside from demand, buyers have also been adversely impacted by inflationary pressure and supply chain issues. Everything from materials to labor to the transport of both cost more today than when many began their projects. While this may not hit them too hard on existing projects, especially those near completion, it will definitely slow down new housing starts as the builders and those financing them digest the risk involved and the potential for the market to worsen further cutting into or eliminating profit. This could mean tough times as many were hoping that new construction could solve the still stubborn scarcity of homes for those looking,
This could actually be a positive situation for investors in several categories.
- Landlords – Rents have seen some crazy increases in the market as the housing scarcity is about more than just buying and selling. Every sold home is another potential renter leaving the market. Many cities and states are seeing a shortage of decent rental housing stock and as long as the shortage of homes to buy continues, renters should be easy to find and vacancies should be minimized. Couple this with the meteoric rise of short-term rentals and you have a very difficult market for renters and a good one for landlords.
- Flippers – Assuming that they can find a decent project, flippers could benefit greatly in selling a rehab to clients who would potentially have bought new construction. Both types of properties typically offer the modern amenities and updates that many buyers are looking for. Small and nimble investors who can find decent homes in desirable areas should be able to manage the risk and uncertainty better than bigger home builders as their project timelines are usually shorter. This allows them to better manage costs and volatility.
This is uncharted territory. While there are similarities with other crazy markets, this one has some very unique and confounding components that we have rarely if ever seen. Behavior from everyone in the housing chain from buyers to builders have all begun to realize just how unpredictable the next few months and maybe years could be. For investors, the key is a good plan and assembling the right team to support them. There will be opportunities for decent gain for those who are patient and execute well.
Sellers – This news also has an impact on sellers, so divorcing couples should take note. They may see a bit of a reprieve in the rapid market descent. Until inventory reaches historical levels, sellers may still be able maximize an equity split, but this may be fleeting. The key is not to wait too long with long divorce timelines that handcuff them into an inability to act. The market conditions that have builders concerned will eventually catch up to other parts of the market including sellers of existing homes or the market will stabilize stripping sellers out of their advantage. Now is a good time to fully explore any options related to selling the home to avoid missing the market. Finally, any seller with homes that have a lot of deferred maintenance or that need substantial work need to reset their expectations and possibly consider selling to an investor who has the resources and incentive to bring the him to a easily salable condition.