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November Belco Bulletin: October Reflections and Looking Ahead

Crisp 100 dollar bills formed to shape a house

Amidst the ongoing challenges overshadowing the housing market, the prominent issue of affordability seems to loom large. Although the term generally carries negative implications, it’s crucial to recognize that not all hope is lost.

Data Trends: Housing Market Numbers

The recent surge in mortgage rates to a 23-year high undoubtedly presents a challenging landscape. As reflected in the 10/5 Federal Reserve Economic Data (FRED), rates reached an alarming 7.79%. The upward trajectory of home prices, with the 8/1 reading at 311.499, marking a 0.43% increase from July, (a 2.57% rise from a year ago and a staggering 15.88% surge over two years) is certainly daunting. Additionally, builder confidence has plummeted to its lowest level since February, with a national index reading of 40 (Southern states at 43 and Western states at 35). However, there are glimmers of hope in the housing market indicators that account for continued success for Belco and our valuable industry partners.

Balancing Factors: Finding Hope in New Construction

Amidst these concerning statistics, there remains a beacon of hope. Robert Dietz, the Chief Economist for the National Association of Home Builders (NAHB), highlights that the persisting shortage of resale inventory continues to provide vital support for the new construction market. Notably, new construction accounts for a remarkable 31% of the available inventory, surpassing historical norms ranging from 12% to 14%. This robust surge in new construction is mirrored in the recent monthly starts data, showcasing a positive trend both nationally and in our top markets.

Cautious Outlook and Forward-looking Permits

However, the nuance keeps coming, folks. The relatively stagnant single-family permit activity hints at a cautious outlook for the immediate future. While some builders continue to procure permits for specific code requirements, the overall sentiment seems guarded. It’s evident that all industry stakeholders are diligently strategizing to conclude 2023 on a positive note and position themselves for a successful 2024.

Impact of the "Headline Effect" and Market Ranking Insights

In line with these assessments, Ali Wolf from Zonda raises a crucial point about the impact of the “headline effect.” Consumer perception of the housing market’s expensive nature is exacerbated by media coverage. This seems to be pushing more potential buyers to the sidelines. But the new Zonda Market Ranking reveals that several markets are performing at average or better levels. These findings suggest a more positive picture of market performance. Just remember, strategies for savvy market players are found in the statistics, not the headlines!

Incentives and Industry Pressures: Mortgage Rate Buydowns

Furthermore, over 50% of ongoing projects in the US are currently offering various incentives, with the most popular being mortgage rate buy-downs. Approximately 80% of builders consider this approach the most effective way to stimulate buyer interest. The prevailing buy-down rates are now in the high 5% range, as opposed to the 4-5% range observed in the previous quarter.

Challenges and Anticipating Demand

Despite the nuanced outlook, it’s crucial to acknowledge that new home construction isn’t immune to the industry’s pressures. Builders continue to grapple with labor shortages, limited buildable lots, and heightened financing costs. Zonda surveyed builders, and while 56% acknowledge a slower demand, only 28% of the total surveyed express significant concern. The slowdown is attributed to timing and anticipating pent-up demand. Ultimately, striking a balance between housing market demand and affordability remains a crucial goal for the industry.

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