The Housing Market is the Economy’s Latest Victim
D.R. Horton (NYSE: DHI) is the largest U.S. homebuilder. As such its perspective on the housing market bears quite a bit of weight. Right now, its opinion is that buyers are quickly fleeing the housing market. That’s not a good sign for the economy that’s already been battered by higher interest rates and inflation.
What are the signs they’ve seen. First, in Q4, buyers canceled almost a third of the deals made with DHI. A year ago, that figure was 19%. Second, new orders declined from a year earlier by 15%. And that decline was also stuck with a 10%-in-value drop in the 13,572 houses sold this year.
DHI has had to walk away from land deals that no longer meet their metrics, writing off $34 million in deposits and expenses tied to those transactions. They’re also offering more incentives to sellers to close deals.
Mortgage Rates Are A Drag On The Housing Market.
The increase in mortgage rates this year has been historic. The Federal Reserve has been aggressive in its campaign to cool inflation. It seems to have worked for the housing market, as the higher rates have diminished housing demand and has also depressed builder confidence.
Today the average 30-year fixed-rate mortgage carries an interest rate of about 7% - more than twice what it was a year ago. The Mortgage Bankers Association says the uptick in borrowing costs has caused a slump in mortgage demand, which now sits at a 22-year low. With higher mortgage rates, high inflation, and uncertainty about the economy in general, many home buyers are deferring their decision to buy or even canceling plans to buy altogether.
Homebuilders’ bottom lines have also taken a hit due to the above influences. D.R. Horton’s quarterly results show misses on earnings and revenue. PulteGroup (NYSE: PHM), another large homebuilding concern, also reported order cancellations last quarter at 24% compared to 15% in last year’s Q2.
Ripple Effects.
When new and existing home sales tank it can affect other industries and the economy in general. A new home often means new furnishings: living room sets, bedroom sets, dining room sets, etc. There are also products homeowners purchase that renters don’t – lawn/yard care products for instance. We may not see much of an effect for another quarter or two, though, as home improvement stores’ earnings can lag the housing market. The Home Depot®, the world's largest home improvement retailer, reported sales of $43.8 billion for the second quarter of fiscal 2022, an increase of $2.7 billion, or 6.5% from the second quarter of fiscal 2021. It remains to be seen if or when the housing slump will affect its bottom line.
What Does It All Mean?
While housing prices will continue to rise, barring a major economic catastrophe, the growth will be slower due to decreased demand. As stated above, interest rates and inflation have spooked buyers to the point of depressing demand. However, for the average home buyer looking for a place to live compared to commercial/investment property investors, it may be more expensive to purchase at these higher interest rates but they’re not something that should deter purchase decisions. First, you’ll be locking in an interest rate before it goes any higher. Second, when rates do come down again – which they will – you can always refinance at a lower rate.
Of course, your decision to buy or not depends on many factors relevant only to your own personal financial situation. Happy house hunting!