It was mortgage rates that finally broke the fever. Their relentless rise got to a level that changed buyer behavior. Earlier this month 30-year mortgage rates rose to their highest level since 2009. Mortgage purchase applications have fallen to their lowest level since 2018. The inventory of unsold single family homes, while still far below pre-pandemic levels, is now rising on a year-over-year basis, according to Altos Research.
This still appears to be a manageable shift for homebuilders. Toll Brothers, a high-end homebuilding company, reported strong earnings last week. In their conference call they said the moderation in demand they’ve seen recently looks on par with the seasonal swings they experienced prior to the pandemic. Their customers put down non-refundable deposits of $75,000 when they place an order — a far cry from the low deposit days of the mid-2000’s housing bubble — so their cancellation rate in May isn’t meaningfully different from the 1% rate they had in the prior quarter.
They’ve also been trying to rebuild their inventories so that when customers come looking for homes, the wait is closer to the 9 to 10 months it’s been historically, rather than the 15 months this past year. A mild slowdown that allows builders to focus on completing existing orders and replenish inventories is fine by them.
For people looking to buy, there are three good reasons to wait. The first is that we’re exiting the seasonally-strongest period of the year. Even in a normal housing market you’d expect the supply of houses to rise and pricing to flatten out over the next few months. In general, if you haven’t found what you want by Memorial Day, there’s no reason to buy a place in a hurry.
The second is that for the first time since the pandemic, the market is softening. There are going to be more homes for sale a month from now than there are today. The percentage of homes taking price cuts, while still below normal, is rising quickly. If the economy experiences a soft landing rather than a hard landing, investors in stocks might regret waiting to buy, but housing is slower-moving and a different dynamic. Whether we get a soft landing or a hard landing, you have time to wait a little while to see which one it’s going to be.
The third reason is that with the overall economy showing signs of weakness, longer-term interest rates have actually been declining in recent weeks, which is just starting to show up in mortgage rates. Mortgage rates fell to a one-month low this week — if the economy continues to deteriorate, the conversation on mortgage rates could shift from whether they’ll hit 6% to whether they’ll fall back below 5%.
My view of the housing market is we’re getting the rebalancing we knew we needed at the end of the year. Inventories are rising from historic lows to something closer to normal. Price growth should level out for awhile, perhaps with some modest declines in the markets that experienced the largest growth. But above-trend employment and wage growth should prevent things from getting too extreme. And there’s a decent chance mortgage rates will fall more from current levels as markets get more confident that the Federal Reserve will be able to curb inflation.
Conditions might not work out exactly as I expect, but it still makes sense for homebuyers to wait until the picture is clearer. Economically-sensitive stocks will surge ahead of a stabilization in the economy but the housing market isn’t like that. A lot has changed in the past three months, and another month or two could make an even bigger difference.
More From Other Writers at Bloomberg Opinion:
Adjustable Mortgage Rush Isn’t the Same as 2008: Alexis Leondis
Long Covid in Real Estate Weighs on Core Inflation: John Authers
Red-Hot Home Prices Freeze Out Lower Earners: Jonathan Levin
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments and may have a stake in the areas he writes about.
More stories like this are available on bloomberg.com/opinion