While inflation remains elevated and government jobs data suggests continued strength in the labor market, shocks to the economy related to the collapse of Silicon Valley Bank suggest the Federal Reserve may pause or moderate short-term interest rate increases.
Zonda chief economist Ali Wolf said prior to the collapse, a 50-basis-point increase was expected during the Federal Reserve’s March meeting, but now either a 25-bp increase or no increase is more likely.
“We were getting pretty close to 7% interest rates, and mortgage rates would have gone higher on the basis of [February’s] strong jobs report, and a 50-bp increase from the Fed would have been almost guaranteed,” Wolf said during Zonda’s most recent National Housing Market Update webinar. “Yet, here we are in a completely different environment in just a few days' time.”
Wolf said even prior to the SVB collapse, available data provided an inconsistent picture on whether or not further rate hikes were needed to cool the economy. While jobs data from the Bureau of Labor Statistics indicated strong growth in both January and February and greater labor force participation, data from LinkedIn’s Workforce Report—skewed more toward private-sector, white-collar industries—indicated hiring decreased 6.5% month over month and 27.9% year over year in February.
Wolf said inflation data paints a similarly mixed picture on price stability. While the Personal Consumption Expenditures index indicated higher inflation on both a month-over-month and year-over-year basis, data from the Consumer Price Index indicated “better-than-expected” results month over month and year over year.
“There are so many different data sources, none of them pointing in the right directional trend or telling you the same story,” Wolf said. “High level, we understand inflation is past the point of peak from that year-over-year change. But we’re still talking about [inflation] up between 5% to 6% compared to last year when the target is 2%.”
Healthy Start to Spring Selling and Dynamic Pricing
Data through February, prior to changes in the first two weeks of March, indicated the spring selling season “was off to a pretty healthy start,” according to Wolf. Over 50% of builders reported to Zonda a positive response from consumers to interest rates in the 6s compared with the 7s. According to Zonda, new-home sales, while down 23.7% year over year in February, increased 13.5% on a month-over-month basis.
“The builders were saying there’s a positive response [to lower rates], but we had to meet the consumers where they wanted to be. We had to do some kind of change, whether to price or to the interest rate, to drive some of the interest,” Wolf said.
Wolf said builders were successful finding the market toward the end of 2022 through a combination of incentives and price cuts. According to Zonda’s division president survey, over 60% of builders reported being willing and able to buy down 30-year fixed-rate mortgage rates to the mid-4% or low 5% range, and over half of builders lowered prices on a year-over-year basis between 5% and 20%. Wolf said the combination of price cuts and buydowns helped prospective buyers overcome the fear of buying at the top of the market.
“We had a sizable amount of builders say [February] started strong, and then interest rates went toward 7% and market demand slowed,” Wolf said. “We’re in a tricky environment now where rates have come down, but economic uncertainty has gone up and pretty quickly. Traffic and sales are below where they were last year for most markets but definitely seeing more signs of life.”
According to builder respondents to Zonda, consumer comfort with interest rates; positive response to discounts, deals, and incentives; and pent-up demand are top contributors to the increase in traffic in the early months of 2023.
Zonda senior managing principal Tim Sullivan said 88% of respondents indicated demand was either in line with expectations or stronger than expected through February. Despite strong demand, however, he said two in three builders reported experiencing challenges related to buyer hesitancy in response to overall economic uncertainty.
In February, 56% of builders held prices flat, while an equal mix of builders (22%) lowered prices and raised prices. The share of builders raising prices represented an increase from the end of 2022, when very few builders were taking that action. Wolf said supply and demand dynamics, limited resale inventory, and a correction from steeper price cuts are contributing factors to builders raising prices.
“Builders finding the market is an art, not a science. We talked to a lot of builders that lowered prices to the tune of 10% to 20%, a lot of consumers returned [to the market], and now they’re raising prices to try and temper that level of growth,” Wolf said.
Sullivan said 55% of builders said they expect starts activity to decrease in 2023 compared with last year, a decrease from 75% of builders as recently as November.
“There is a little more optimism about getting to the point where we are at or pretty close to the expectations of our business plans for 2023,” Sullivan said.
In regard to land, Sullivan said 62% of builders reported cautiously moving forward with land acquisitions, while 11% of builders said they are moving “full steam ahead.” One in 10 builder respondents reported pausing on land deals entirely. Two-thirds of respondents reported land prices have remained flat, and 21% of builders reported select land prices are coming down.
Wolf and Sullivan said while some optimism has reemerged in the housing market, changes to the market, including the SVB collapse, can present dramatic changes to sentiment and market activity.
“I’ve heard a lot of optimism and borderline exuberance about how housing is back for good, we’ve worked through the slowdown, and we’re in growth mode,” Wolf said. “What we all need is to have a little bit of humility about how things are changing so much in real time.”
Regional Differences
During the webinar, Wolf dissected trends in sales rates, quick move-ins (QMIs), resale inventory, and price movement across several major metro markets in six regions across the country to highlight how not all markets are behaving similarly.
In the Pacific region, most major metros reported lower sales rates on a year-over-year basis, and most markets, excluding San Francisco and Sacramento, California, reported sales rates higher than compared with 2019 levels. All analyzed markets reported decreases in pricing from peak levels, with San Francisco experienced the largest magnitude of decline. Wolf said in the Pacific region there is “very little risk of oversupply.”
Metros in the Rocky Mountain region reported lower sales rates on both a year-over-year basis and compared with 2019. While prices are down from peak levels, Wolf said the payment-to-income ratios are “out of whack” in the region. According to Zonda, sales will improve when the region can better align prices with area median incomes.
In the Southwest region, analyzed regions reported lower sales on a year-over-year basis, but several metros, including Dallas, Houston, and San Antonio, cited sales levels well above 2019 levels. Metros in the region are also “within striking range” of 2019 inventory levels, unlike many regions across the country.
“Our big takeaway from the Southwest is that we think we will continue to see some slower starts in this region until we work through the pipeline,” Wolf said.
Wolf said the Midwest region is “a mixed bag,” with some metros outperforming sales levels from 2019 and some metros performing below 2019 sales levels. Cincinnati, Columbus, Ohio, and Minneapolis have QMI inventory levels over 100% higher than 2019.
“When you look at the high levels of QMI, this is a good thing for the builders because when you look at resale inventory across every market in the region [compared with 2019], we are seeing it down 50% to 60%,” Wolf said. “I think this is a really big opportunity for the builders right now.”
All analyzed markets in the Southeast region had sales rates down on a year-over-year basis, but markets such as Charlotte and Raleigh, North Carolina; Nashville, Tennessee; and Miami had sales levels down in the single-digits compared with 2022. Markets in the region continue to outperform 2019 sales levels, while Jacksonville, Florida, and Louisville, Kentucky, have high levels of QMI compared with 2019.
Trends in the Northeast are similar to the Southeast, according to Wolf, with higher sales rates compared with 2019 levels. However, QMI levels are not much different from 2019 levels, the number of total units under construction are small in terms of volume, and resale inventory is down over 50% across major markets. Wolf said the lack of inventory is allowing more price stability and better average sales rate per builder, but total sales levels are down in volume terms.
