Signs of a Sweetening Housing Market
The theme of the summer at least here in the digital pages of The Sunday Morning Post has been the documentation of an economy in transition [See: Construction (6/23), Retail (7/7), Rentals (7/14), and Rates (8/11)]. The ship is turning. This week I’m ready to add a fifth category of discussion: homes. There is no doubt about it, the home market is changing. For buyers, the dog days of summer have brought a taste of sweetness after what has been an otherwise bitter 4+ years.
Choices
Inventory is still low relative to pre-pandemic times, but it’s getting better. According to data from Realtor.com, there were nearly 885,000 active listings nationwide in July. The interesting thing here is that the number of active listings in July 2023 was just 667,000, which means we are seeing a nearly 33% increase in the last year. Now this should be taken with a grain of salt: we are still about 30% lower than the pre-pandemic comparative month of July 2019, which had nearly 1.24 million listings. It does appear, however, that we are coming out of the trough. As I’ve written up before, I believe there is tremendous pent-up demand among sellers, many of whom have become trapped by interest-rate handcuffs (i.e. not wanting to give up their 3.0% or better interest rates in the current market). But life happens. Eventually people get other pressures to sell, or just lose patience. Some of these homes are now hitting the market, which is boosting inventory. Homes are also lasting longer on the market once listed: the average home is staying on the market for 50 days right now, as compared to 45 days in July 2023 and 34 days in July 2022.
Completions and Competition
As noted at the outset, construction starts are down. New single-family home starts are down about 15% in July as compared to July 2023. But, on the other hand, there was a tremendous amount of new construction that began in 2022-2023 that is now hitting the market. New single-family home completions are near 15-year highs, with homes being completed at an annualized rate of over one million new homes per year as of July, as illustrated in the chart below. New single-family home completions have steadily risen over the past decade:
Why does this matter? For starters, a lot of these homes are built as spec homes (i.e. built just to be sold on the open market), which helps to boost the inventory of homes-for-sale along the lines of what was discussed above. But secondly, the construction of new homes whether it be for spec purposes or by builders who are building for a specific customer, helps to take these buyers out of the market, which reduces the competition. By doing so, the strong rate of construction has helped to release that pressure valve just slightly on the overall frenzied market. It may sound like an obvious statement, but every home that is completed is a place for someone to live, and as people occupy these homes, it ripples through the rest of the competitive landscape even if it is only incrementally so by steadily pulling buyers out of the pool.
Rates
Yes, as discussed as recently as last week, interest rates are easing down. The most recent peak-high interest rate came in October 2023, when the average 30-year fixed mortgage rate was approaching 8.0%. Since then, however, rates have eased down to a tick below 6.50%. That makes a big difference to would-be buyers, saving potentially hundreds of dollars per month and thousands of dollars per year in interest. Just in the past month, rates have dropped nearly 50 basis points (i.e. 0.50%) thanks to weak data in spending and employment. While those are potentially bad leading indicators on the overall economy, the drop in interest rates (and expected continued drops through the rest of the year) provides some hope and relief (and savings) to borrowers.
What Comes Next
It’s not all roses and butterflies. The math is still tough. Although interest rates have come down a bit, home prices have not come down in a way that would truly help the math (you need both variables to come down in order to see serious mathematical improvements). According to the S&P CoreLogic Case-Shiller U.S. Home Price Index, through May, which is the most recent month for which data is available, home prices were still up nearly 6.0% year-over-year.
There is weakness in other areas of the housing economy, though, including builder confidence. The National Association of Homebuilders/Wells Fargo index of homebuilder sentiment is at its lowest reading of the year, finding:
Builder confidence in the market for new single-family homes fell to 39 in August, down two points from a downwardly revised reading of 41 in July. This is the lowest reading since December 2023. A lack of affordability and buyer hesitation stemming from elevated interest rates and high home prices contributed to the continued decline in builder sentiment.
Then again, sentiment is all in the eye of the beholder: the very things that make homebuilders pessimistic are things that might give further encouragement to buyers. The NAHB/Wells Fargo report also found that “builders are increasingly cutting prices to bolster home sales (33% of builders did so in August compared to 31% in July and 29% in June).”
It is a complicated economy. What is good news to some may be bad news to others, and vice versa. And while the news certainly seems more positive for would-be buyers at the moment, it should be noted that a drop in interest rates is a reflection of an overall weaker economy. The benefits of a better borrowing environment may be outweighed by weakness in other areas, including the labor market. All that being said, buyers should continue to be patient as the variables cropping up at the moment that suggest a more advantageous buyers’ market look to be more like the start of intermediate-term trends rather than temporary outliers.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.