Key Takeaways:
- Demand is plunging based on affordability and an uncertain economy;
- K+B remodels are slowing, but underlying demand offers promise;
- Sellers are pausing, with newly-listed homes off by double-digits YOY;
- Builders are hesitant to commit to new starts.
By Robert Isler
In normal cycles, when faced with the twin realities of rising inflation and rising rates, demand dries and home prices tumble. But these are not normal times. Although demand has fallen sharply – new and existing home sales are down YOY 30 percent and 20 percent, respectively – home prices are dropping but by no means experiencing a meaningful decline.
To get a sense of what’s happening beneath the surface, let’s look at the situation from the perspective of each group: home buyers, sellers and builders.
Buyers
Home inventory has been hovering near record lows for quite some time, resulting in a very competitive buyers market. As late as this past spring, according to Realtor.com, inventory was 60 percent lower than the same period two years earlier. This means that for every five homes on the market in April 2020, there were only two for sale in April 2022. Median home prices during that same period shot up 32 percent, yet buyers, often led by millennials, continued chasing their dream home as demand far outstripped supply.
The cost of borrowing, however, is finally forcing potential buyers to pull back. According to the mid-year update of NKBA’s Kitchen & Bath Market Outlook, 50 million households could afford a $400,000 mortgage at an interest rate of 3 percent. But at the 5.8 percent interest rate reported at the report’s release in July, only 32 million households could do so. Additionally, a growing number of potential buyers are backing out of deals based on affordability and the fear that if there were a recession, any home purchase would soon fall in value.
Many have opted to wait for the economy to settle, hoping prices will become more attractive. A recent Redfin report noted that 63,000 home purchase agreements were called off in July, equal to about 16 percent of all homes that went into contract. Mortgage applications are down sharply as well, 23 percent below last year.
The longer term appears promising for kitchen + bath remodels, however, as a significant number of homes enter the 20-39 age-range, the sweet spot for upgrades.
Sellers
Sellers had been enjoying a supply and demand imbalance decidedly in their favor, often receiving a dozen or more bids on their homes. Winning offers often surpassed the asking price, sometimes by as much as six-figures. According to Redfin, 54 percent of homes sold in 2021 exceeded the asking price, well above the 26 percent in 2020.
Now, however, the average home during the four-week period ending August 28th has sold for less than its asking price for the first time in over 17 months. Additionally, Realtor.com reported that 20 percent of sellers dropped their asking price in August, nearly double the 11 percent recorded in 2021. Following the pattern of buyers, sellers are also pressing pause, with the number of newly-listed homes off by over 13 percent YOY.
Builders
Both buyers and sellers are in a holding pattern based on market conditions and builders are taking notice, and reassessing. According to Zonda’s webinar, Housing Market Forecast: Q3, 87 percent of builders said they plan to slow new housing starts. In fact, housing starts are down 20 percent compared with last year. Sentiment of single-family home builders – other than a brief plunge at the start of the pandemic – is the lowest it has been since June 2014 according to the National Association of Home Builders (NAHB). NAHB’s August Housing Market Index (HMI) came in at 49, six points below July, its eighth consecutive monthly drop. Any score below 50 is considered contraction.
The Takeaway
The Fed’s aggressive rate policy is helping to cool a red-hot housing market, though prices are still above the norm. Although the median home sales price in July of $403,800 was $10,000 below the previous month, reports the National Association of Realtors(NAR), it’s still almost 11 percent higher than a year ago. A number of housing-related organizations have also recently raised their 2022 home price appreciation forecasts vs. the beginning of the year.
Some markets are experiencing price declines and more are sure to follow, but the question experts are asking is not how far prices will fall but to what extent price appreciation will decelerate.
Project sales will likely continue to slow until the Fed puts the brakes on rate hikes. The longer term appears promising for kitchen + bath remodels, however, as millennials flex their home-buying muscles and a significant number of homes enter the 20-39 age-range, the sweet spot for upgrades.