Homebuilders are still buying down rates to move houses

Key Takeaways:

– Single-family permits have not fallen, keeping construction workers employed to finish backlog of homes
– New home sales are not booming, still at 1990s level
– Supply of new houses for sale is 8.4 months
– Builders will pause construction when supply is over 6.5 months
– Monthly supply data breakdown shows only 85,000 completed homes ready for sale
– Builders will build slowly due to backlog of homes and focus on selling completed units
– Mortgage rates in the 6% range allow for potential growth in new home sales

HousingWire:

This has kept single-family permits from falling and kept construction workers employed to build and finish the backlog of single-family homes in the pipeline.

We obviously can’t say that the apartment marketplace and permits are back to recession lows.

So, for now, homebuilders can still keep construction workers employed in the single-family housing market as they slowly work through the backlog of homes.

From Census: New Home Sales: Sales of new single‐family houses in February 2024 were at a seasonally adjusted annual rate of 662,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

As we can see below, new home sales aren’t booming. We are still at the level seen in the 1990s, so no record-breaking demand is happening here like we saw in the run-up to 2005, which took new home sales up to 1.4 million. However, slow and steady wins the race.

For sale inventory and months’ supply: The seasonally‐adjusted estimate of new houses for sale at the end of February was 463,000. This represents a supply of 8.4 months at the current sales rate.

Here’s my model for understanding the builders:

  • When supply is 4.3 months and below, this is an excellent market for builders.
  • When supply is 4.4-6.4 months, this is just an OK market for builders. They will build as long as new home sales are growing.
  • When supply is over 6.5 months, the builders will pause construction. 

This housing cycle is unique due to the historic backlog of homes the builders still have, so they will be mindful to ensure they can sell those homes once they’re completed units. If the original contract buyer can’t buy now, they must ensure they can sell that new home to a new buyer. As you can imagine with 8.4 months of supply, don’t expect the builders to be building single-family homes in a big fashion. They will go nice and slow because they’re not the March of Dimes; they’re here to make money. 

One of the things I like to do is break down the monthly supply data into subcategories. People sometimes believe that the monthly supply of new homes means live, completed homes ready to buy, but that isn’t the case. In this report:

  • 1.5 months of the supply are homes completed and ready for sale — about 85,000 homes.
  • 4.9 months of the supply are homes that are still under construction — about 272,000 homes
  • 1.9 months of the supply are homes that haven’t been started yet — about 106,000 homes

As shown below, we only have 85,000 completed homes ready for sale.

This report had some minor positive revisions to the previous month, so to keep things simple, as long as mortgage rates don’t head toward 8%, new home sales have the backdrop to grow sales if rates are in the 6% range because they can buy down rates to a sub-6% level to move homes. It gets much more expensive for them to do this at 8%.

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Property Chomp’s Take:

Alright, let’s talk about the current state of the housing market, specifically the single-family home sector. Despite some challenges, there is some good news to report. Single-family permits have managed to stay afloat, preventing a significant decline and ensuring that construction workers have been able to stay employed. This has allowed them to continue building and finishing the backlog of single-family homes that are still in the pipeline.

Now, it’s important to note that we’re not out of the woods just yet. The apartment market and permits may not be at their best, but the single-family housing market is holding steady. According to the latest data from the Census Bureau, new home sales in February 2024 were at a rate of 662,000 annually. While this may not be a record-breaking figure, it’s a positive sign of slow and steady growth.

Looking at the inventory and months’ supply of new homes for sale, we can see that there is currently a supply of 8.4 months at the current sales rate. In general, when the supply is below 4.3 months, it’s a great market for builders. Between 4.4-6.4 months is considered okay, and anything over 6.5 months may lead builders to pause construction.

The housing cycle we’re in right now is unique due to the backlog of homes that builders still need to sell. With 8.4 months of supply, builders will likely proceed cautiously and focus on selling existing inventory before ramping up construction.

Breaking down the monthly supply data further, we see that there are about 85,000 completed homes ready for sale, 272,000 homes still under construction, and 106,000 homes that haven’t been started yet. This gives us a clearer picture of the current state of the market.

Overall, as long as mortgage rates remain reasonable, new home sales have the potential to grow. Keeping rates below 6% allows for flexibility in pricing homes to attract buyers. However, if rates were to rise significantly, such as towards 8%, it could pose challenges for the market.

In conclusion, while the single-family housing market may not be booming, it’s showing signs of resilience and stability. Builders are navigating the current landscape carefully, ensuring they can sell homes effectively in the coming months. It’s a slow and steady approach, but one that can lead to long-term success in the industry.