Leadership

Only The Months Ahead Will Tell Whether Buyers Are Okay With Higher-For-Longer

You'd think, judging from the narrative so far, the cure for high prices might be to simply get used to them. Don't consider them an ailment worth the effort to cure. But that's a risky bet.

Leadership

Only The Months Ahead Will Tell Whether Buyers Are Okay With Higher-For-Longer

You'd think, judging from the narrative so far, the cure for high prices might be to simply get used to them. Don't consider them an ailment worth the effort to cure. But that's a risky bet.

May 30th, 2024
Only The Months Ahead Will Tell Whether Buyers Are Okay With Higher-For-Longer
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The cure for high prices was always supposed to be high prices.

So much for that truism, when – by some counts – U.S. housing supply sits at minus 760,000 on the single-family for-sale side, and 760,000 on the for-rent side, as we speak.

Bar chart ranging from 2000 to 2024 showing oversupply and undersupply of U.S. residential rental and for-sale properties.
Source: ResiClub Analytics

ResiClub's Lance Lambert poses a question, what's to happen if the real estate and construction business community can't make up for a 1.5 million home under-build?

Without such units, the pressure on housing markets will persist,” wrote Freddie Mac economists.

Considering the constraints, and taken together with a determined demand stream for new homes in today's market, the cure for high prices might instead be to simply get used to them. Don't consider them an ailment worth the effort to cure.

That would be a big bet. As The Builder's Daily contributor Scott Cox notes here:

No one knows exactly what demand will be as there are too many intersecting factors – natural population increase, immigration, headship rates, etc. Remember that net housing demand is less than gross when calculated nationwide. People and jobs move, but houses do not. And most especially, price equilibrates so what is the demand at the price points we can supply?"

An unanswered question – especially, given the number of "intersecting factors," as Cox mentions, and variables having to do with spending tolerance differences due to higher household earnings levels for first-time buyers, and later family formation trends, etc – might be: Have American homebuyers truly begun to get used to new, higher norms as far as first-costs for ownership and mortgage rates, or have a certain select few merely continued to test their own financial and intestinal tolerance points for the pricing regime?

A "pull forward" dimension of the past 18 months' demand stream may be unappreciated. A "life happens" dimension will continue to drive demand, especially among young adults in family-formation mode. Still, the math of pricing would-be buyers into homeownership and the psychology of their trying to decide whether now or some other time may be better to take the plunge now have an emerging third level of challenge: Sheer exhaustion.

What's more, we've picked up vibration on the tracks among some private homebuilder owners and principals that "things have slowed down" in places that public C-suite execs have generally talked about as strong markets and submarkets. While we expect that public builder team gains may already be coming at the expense of private builder pain, that factor could amount to distortion that could obscure a shift in buyers' price- and mortgage-rate elasticity tolerance or intolerance.

A split-screen consumer narrative – "haves" relatively buffered from cost-of-living stress and strain have powered consumer spending's important role in a strong and steady economy, while "have nots" bear the brunt of continued kitchen table struggles to keep up with the bills – may be another source of distortion when it comes to measuring and monitoring the health of new-home buying demand.

There comes a time when you must start questioning whether every piece of negative residential real estate news that focuses on the existing homes market is a positive for homebuilders.

Pending Home Sales, for instance, which according to the National Association of Realtors,

...dropped 7.7% to 72.3, the lowest reading since the early months of the pandemic. The monthly decline was steeper than all estimates in a Bloomberg survey of economists and the worst since February 2021."

Our friend Truman Patterson, who leads the homebuilder and building products and materials equity research team at Wolfe Research, cast the Pending Home Sales reading in even more dramatically negative terms, but qualified it as a "modest positive" for homebuilders.

Excluding April 2020 during the peak of the pandemic lockdowns, April 2024’s 72.3 reading is the lowest in the index’s history, demonstrating the impacts of tight resale supply, affordability constraints and rate lock. This is a modest positive for the homebuilders as New Home construction is currently the primary source to satiate consumer demand. The April reading is below GFC levels and is -34% below April 2021’s level. Previously mentioned, weak Existing Sales activity is principally being driven by affordability constraints and a dearth of inventory, in part, driven by “rate lock” as current homeowners elect to remain in their existing residence. Positively, the Homebuilders have the Affordability advantage given their employment of mortgage rate buydowns easing monthly payments." – Wolfe Research

Being the only game in town does not guarantee that there will be enough players with the means to keep entering the arena.

There are strong signs it's time to keep closer – and more skeptical – track of the pulse and measures of consumer behaviors and make doubly sure that each metric you take to be a signal of confidence, intention, and behavior is exactly that.

U.S. consumers and businesses alike have turned cautious on spending this year because of elevated inflation and interest rates, according to Bank of America CEO Brian Moynihan.
Whether it's households or small- to medium-sized businesses, Bank of America clients are slowing down the rate of purchases made for everything from hard goods to software, Moynihan said Thursday at a financial conference held in New York."– CNBC

Whether or not there are 1.5 million too few used residential properties to choose from, it wouldn't be the first time consumer households – even the millions of young adult Millennial and GenZ households whose goal is homeownership – might have to wait for an old-school cure for high prices.

ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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