The aggregate market value of owner-occupied real estate continued its upward trend during the fourth quarter of 2017.
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While inflation has begun showing signs of improvement on both a year-over-year and month-over-month basis, there is not enough evidence to give confidence that inflation is on a sustained path downward.

As a result, Zonda chief economist Ali Wolf says the Federal Reserve will likely continue with more short-term interest rate increases in an attempt to bring inflation back to the target level of 2%.

“While we’re seeing improvement [related to inflation], the job is not done,” Wolf said on Zonda’s most recent National Housing Market Update webinar. “A 3.5% unemployment rate, 5% wage growth, [and] a lot of job openings supports the idea [of maximum employment]. But price stability is not there.”

Wolf says it is likely the Federal Reserve will raise short-term interest rates two to three more times this year, but the magnitude of the increases will likely be 25 or 50 basis points, rather than 75 basis points. Tracking consumer spending will be an important indicator to the Federal Reserve on the impact of interest rate hikes and overall economic health. However, consumer spending is holding, with retail sales up 5.2% on a year-over-year basis, spending on goods up 15% from pre-pandemic levels, and spending on services up 4% from pre-pandemic levels.

“You’re not seeing that spending is rolling over in the way that the Federal Reserve would have imagined when they are trying to slow the economy,” Wolf says.

Wolf says expectations remain that the economy will fall into a recession during 2023, though the magnitude of the recession will be “mild and short.”

Buyer Pullback

Despite interest rates cooling from 7% to 6%, monthly payments facing prospective buyers are still higher by 30% to 60% in many major metro markets, deterring buyer activity and forcing many potential buyers to reset expectations, Wolf says. Buyers unable to adjust their budget are facing “disappointing and frustrating” situations where they are paying “more money for a lesser home.”

“I think we’re going to have to take some time getting through [buyer frustrations]. From the builder perspective, we know there are some incentives to help with the mindset of that,” Wolf says. “[But] as we ask what is happening in the market, the clear response is that buyers are pulling back.”

Wolf says national existing home sales rates are at the same levels as November 2010 while national new-home sales rates are tracking at similar levels to 2016. However, regional differences are still present, and markets in the Southeast, Midwest, and Northeast—including Jacksonville, Tampa, and Miami, Florida; Indianapolis; and Raleigh and Charlotte, North Carolina—are holding up with sales rates in line with or above 2019 levels. Western markets—including Phoenix, Denver, Las Vegas, and California's Riverside and Sacramento—have experienced sales rates that have dropped significantly compared with 2019 levels. Wolf says many of the Western markets were “in a free fall” during the latter months of 2022 but appear to have bottomed out.

“It’s not a snap back where everything is fine [in these markets], but there’s starting to be a little more traffic and consumers are responding better to the deals they are finding on the ground,” Wolf says.

According to Zonda’s division president survey, 76% of builders anticipate lower prices in 2023 compared with 2022, with 40% of respondents expecting prices to decrease by 5% to 10%.

Market Impasse: Buyer’s and Seller’s Strike

For prospective buyers, Wolf says the prevailing attitude has shifted from a fear of missing out to a fear of buying at the top. Additionally, fears of a potential recession and news of ongoing layoffs are making many buyers wary about making purchasing decisions in an uncertain economy. High interest rates, monthly payments, and purchase prices are also deterring would-be buyers, all contributing to the “buyer’s strike,” Wolf says.

At the same time the market is experiencing a buyer’s strike, a seller’s strike is also present in the market, Wolf says.

“Oftentimes, consumers still need to sell their home and don’t want to reset their rate,” Wolf says. “Which is why we’re seeing more people that are looking at holding a home as a rental. That pulls from the supply pool without adding to it. That’s one component that’s playing into the seller’s strike that I think will be difficult to overcome.”

Wolf says the cooling of interest rates in addition to rate buydown incentives and price cuts from builders are enticing some consumers to reenter the housing market.

“I think what’s really important is to put yourself in the buyer’s shoes. There needs to be a perception of a deal,” Wolf says. “If fear of buying at the top is persistent and it’s part of a consumer’s thought process as they’re going to buy, perception of a deal helps them get over that.”

Real-Time Housing Stats

According to Zonda’s division president survey, a majority of builders say it is “too soon to tell” if the slight decrease in interest rates is translating into positive responses from consumers. Zonda senior managing principal Tim Sullivan says 36% of respondents reported the change in rates is not generating a positive response from consumers, with many buyers remaining in a “wait and see mode.”

“Interest rate buydowns are not cheap, but [they] will get people off the fence,” Sullivan says. “When you can lock somebody in at 4% or 4.5%, as some public builders are doing, it’s working. But it’s not cheap.”

Sullivan says the impact of price cuts in the market is also dependent on the magnitude of the decrease. Small price cuts typically do not translate to an uptick in sales, while larger price cuts—between 10% and 15%—are helping get prospective buyers off the sidelines. Nearly 60% of builders reported anticipate decreased starts activity between 11% and 30% in 2023 to better align with sales activity, according to Sullivan.

The national cancellation rate among builders surveyed in December was 20%, a slight decline from the rate reported to Zonda in November. However, the cancellation rates tracked by Zonda are significantly higher than the single-digit rates reported by builders in December 2019 and December 2021.

“Buyers are canceling because they are scared, there’s affordability challenges, they are having trouble selling their home, [or] have found a better deal elsewhere,” Sullivan says.