Zonda’s chief economist, Ali Wolf, explained the macroeconomic factors affecting home pricing and sales at NKBA’s Futurist Summit. By Dianne M. Pogoda

 

If understanding the economic factors influencing the housing market seems daunting, Ali Wolf has you covered.

The chief economist at housing market research firm Zonda explained in layman’s terms the current state of the market, the overall economy and what the Federal Reserve’s interest-rate hikes are all about to set up the NKBA Futurist Summit.

The summit, “Home Ownership: The Evolution of the American Dream,” was presented in partnership with Zonda and sponsored by Signature Kitchen Suite.

Wolf discussed four main areas: The general economy, market shifts, the “affordability shock” and forecasts.

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Housing and the Economy: Overview

“Things are changing on almost a daily basis,” she began. “Housing is a local business, but there are macro factors that impact individual housing markets in a blanket way.”

Wolf said the overall economic picture can be focused on three components: employment, wage growth and supply/demand. Currently, employment is good, there are still people who want jobs and companies that want to grow and hire, but the companies are finding a shortage of qualified, skilled talent. Wage growth is at its highest levels in 20 years. But supply-chain challenges remain.

“People want to buy but there’s a shortage of goods available for purchase, which leads to inflation — arguably the biggest economic story right now. The Consumer Price Index is up 9.1 percent from last year, the highest level in 40 years, and spread across multiple sectors. In a healthy economy, inflation is about 2 percent.”

She said the economy is starting to soften a little, — “which is a good thing, because we were on an unhealthy and unsustainable path.” The Federal Reserve is raising interest rates to intentionally try to slow the economy and get back to a healthier path of growth, which could work out, or lead to a recession. The Fed’s rate hikes impact short-term lending, like bank-to-bank overnight loans or credit card rates. Mortgage rates are generally linked to the 10-year treasury yield — when that goes up, the 30-year mortgage rate generally rises with it. “Most economists projected rates would be around 4 percent for most of this year, instead they are hovering between 5 and 5.5 percent, and in some cases, we’ve seen rates at nearly 7 percent. So we’ve seen quick movement and a lot of volatility.”

Shifting Markets

If the Fed’s plan of increasing interest rates works, demand will slow and supply will get back on track — the markets will shift, she offered.

“When interest rates change as quickly as they have, some consumers are more motivated to buy, thinking that purchasing a house is a great hedge against inflation, and that they can lock in a mortgage payment vs. dealing with rising rents. But other buyers will be deterred, and want to wait it out.”

Zonda polled developers about housing demand, revealing that in May, more builders said demand was on track with expectations and wasn’t worrisome. That shifted in July, however, with more builders saying demand was slower than expected — and was starting to cause concern.

Other factors causing market shifts are prices, inventory and the amount of a mortgage payment. The typical mortgage payment at the end of 2021, when rates were around 3.1 percent, has risen between 40 and 60 percent in a little over six months. And, in 11 major markets, home prices are up between 9 and 37 percent, year-over-year.

Wolf said the market is still very strong,  acknowledging that inventories have started to rise again, and prices have flattened in many cases.  For new home sales, about 70 percent of builders held prices flat in July, while 20 percent dropped prices, citing market competition.

The Affordability Shock

The compound effect of overall higher housing prices and rising mortgage rates results in “affordability shock.” Housing is a “payment industry,” meaning people don’t necessarily buy based on price, they buy based on what their monthly payment will be — what they can afford. This is where the market has shifted. And it’s not just about income; People also buy based on wealth. Lifestyle changes have resulted in extra cash, they tapped equity in their homes, cashed in some stocks, saved more, etc.

The most active purchasers right now are entry-level buyers, move-up buyers and relocation buyers — especially those who can work from home now and don’t have to be tied to a specific geographic location.

Entry-level buyers are impacted most by rising rates and prices, and that 40 percent change in the monthly payment. The ones least impacted are cash buyers, because they have money — and wealth — elsewhere in the economy (stocks, other investments, etc.).

What’s Next?

Looking ahead, Wolf said the housing market is indeed cooling, and while some might equate today’s market to the housing bubble bursting in the 2007-2009 recession, she said that’s not a valid comparison, because the markets are very different now. For instance, during the previous cycle, more than a quarter of loans were to borrowers with subpar credit scores. That is not the case today, so the market is more stable.

“Today’s market is already adjusting,” she said. “Data indicates we’ve seen the sales peak, and we’re now at 2019 levels. Slower sales usually mean slower starts. Our forecast is that starts will decline by 11 percent this year — and it might be more, as 87 percent of builders anticipate slowing starts in response to the market.”

The good news, though, is the “unrelenting demand for houses, especially among Millennials. The highest number of Millennials want to buy homes within the next three years, and 80 percent say they would buy a home that requires renovation. We can expect the current economic uncertainty to last for a while. It’s important to strategize, focus on fundamentals, do consumer research, figure out where consumers are willing to compromise. Good product, good operators and good locations always win. Historically, housing usually leads the way into recession, but it’s also the sector that leads the way out of recession.”

The NKBA Futurist Summit is available to watch on-demand here.