Each new housing data point is worse than the last, and they are prompting a leading industry analyst to say the market is in a correction.
Single-family housing starts fell more than 13 percent year-over-year, according to the U.S. Census. Building permits, an indicator of future construction, were down nearly 2 percent.
This followed a sharp drop in homebuilder sentiment to the lowest level in more than three years, according to the National Association of Home Builders.
“I definitely think we’re in a correction,” said John Burns, CEO of John Burns Real Estate Consulting. “Sales, according to our survey last month, were down 19 percent year over year. … I would call that a correction.”
Burns points to higher mortgage rates, along with the surge in home prices over the last few years, as the culprit. Mortgage rates are a full percentage point higher now than they were one year ago. Half of Americans can only afford a $230,000 mortgage, according to Burns, and the builders in good locations just can’t build at that price point. Eleven of the top 19 builders have an average sales price above $400,000.
“The rise in mortgage rates has really been a double whammy for them,” Burns said. “A lot of the focus has been on the first-time buyer who now can afford 7 percent less than they could at the beginning of the year just due to mortgage rates and home prices even worse than that.”
Builders cannot hit the lower price points because of higher costs for land, labor and materials. While they might be able to build cheaper homes farther outside major metropolitan areas, doing so is risky, given that demand there is so weak.
“As long as builders remain concerned about buyer demand, single-family starts are likely to decline as builders adjust production accordingly,” said Danielle Hale, chief economist at Realtor.com. “Rising home prices and mortgage rates have created high hurdles for homebuyers, while cost increases have made it difficult for builders to deliver homes at the most in-demand price points.”
Multi-family housing starts, meanwhile, surged 20 percent last month compared with November 2017. While this monthly reading tends to be volatile, it indicates that the rental market will remain strong for the foreseeable future.
“Bottom line, the single-family figures confirm again the slowdown in the pace of transactions while multifamily reflects the still solid demand for rentals,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Adding to the frustration in the housing market is a stagnation among sellers. While supply is rising slowly because sales are slowing, there are still very few new listings coming onto the market. Current homeowners either can’t afford a new home or don’t want to pay a higher mortgage interest rate on a new home. This is hitting homebuilders as well.
“A lot of them build move-up homes, and we think about a quarter of move-up demand is just not going to move because people have a 3.5 percent fixed-rate mortgage, and that’s a painful thing to give up,” Burns said.
The average rate on the 30-year fixed mortgage is hovering around 5 percent.
While homebuilders are still not ramping up entry-level supply, they are starting to cut prices.
A new survey from the NAHB, which has yet to be released, found 41 percent of builders reported reducing prices as a sales incentive for July through October Oct 2018, up from 26 percent a year earlier.