By Robert isler
Be careful what you wish for.
The Federal Reserve yesterday announced its fourth rate hike this year, increasing interest rates by 0.75 percent. This was the same rate hike as last month, considered the largest single increase by the Central Bank since 1994. Clearly, the Fed is signaling that it is serious in its efforts to tackle inflation.
One of the key reasons cited by the Federal Reserve for its relentless rate hikes this year has been to cool the red hot housing market. And based on housing stats released this month, it has accomplished this goal and then some. As Ian Shepherdson, chief economist at Pantheon Macro said in a Forbes article yesterday: “The sellers market of the early spring became a buyers’ market overnight…”
Other economists have voiced a concern that efforts to put the brakes on housing could very well spill over into the broader economy and result in a recession. In fact, NKBA’s recent Market Outlook midyear release noted that the last three times the Federal Reserve initiated a rate hike cycle, a recession ensued within a year.
How are these developments likely to impact K&B remodeling? According to recent indications, a considerable drop in activity is predicted by NAHB’s recent second quarter Remodeling Market Index and NKBA’s preliminary findings for its KBMI release. Both measure member insights into current and future conditions for remodeling.
Even before this latest rate hike, the impact on housing had been sobering. Zillow recently reported that the average U.S. monthly mortgage payment in June was 60 percent higher than a year ago, coming in at $1613. And mortgage purchase and refinance applications are currently the lowest in 22 years, according to the Mortgage Bankers Association. In addition, the National Association of Realtors reported that June sales of previously owned homes are down 14 percent from last year.
In a recent webinar, Zonda Chief Economist Ali Wolf said that 50 percent of builders surveyed a few months ago indicated they could easily resell a home. Now, only 13 percent feel that way. It’s not surprising then that builder sentiment, as reported in The National Association Home Builders’ July release, is at its lowest level since the height of the pandemic in May of 2020,
Following a prolonged period where bidding wars often resulted in existing homes selling at significantly more than asking price, more homeowners are now dropping their prices than at any time since 2015. New home sales in June dropped 8 percent from May. Meanwhile, the median sales price for homes in June was just above $402,000, a 10 percent drop from $449,000 in May. There is now an eight month supply of new homes available for sale, the most since late 2010.
There is a silver lining in this picture, however. Homeowners’ financial strength is the highest it has been in decades and homeowner equity remains near historic highs. The number of homes at prime remodeling age is also expected to rise through 2025, which means that the nearly 3 in 4 homeowners locked into mortgage rates below 4 percent are likely to remodel rather than chase a new home.
“Home sellers and buyers are adjusting to a new reality in the housing market,” said Zonda’s Ali Wolf recently. She also shared, on a more positive note, that the economy is potentially at or near peak inflation, as housing, home furnishings, electronics and gas prices are all selling at lower prices than previously.
