Homebuilders say sharp slowdown is coming as buyers withdraw

A worker digs plywood on a single family home under construction in Lehi, Utah, Friday, January 7, 2022.

George Fry | Bloomberg | Getty Images

The once-hot housing market is cooling at an alarming rate, and some homebuilders say it will only get worse by the New Year as new orders dry up.

Rapidly escalating mortgage rates have caused homebuyers who were once insane, to act on their heels and worry about their potential investments and the health of the economy as a whole.

“There’s this cliff-hanger going on in January,” said Jane Myers, CEO of Thrive Homebuilders in Denver, which was one of the hottest markets in the years before and across coronavirus pandemic.

Homebuilders in the US have been among the biggest beneficiaries of the Covid economy. Record low interest rates, combined with rising demand from consumers looking for more living space, have caused a housing rush unlike most experienced before. Home prices have gone up more than 40% in just two years, and homebuilders haven’t been able to meet demand fast enough. They even slowed sales just to keep up. All this is over.

Housing starts in single-family homes fell nearly 19% year-over-year in September, according to the US Census. Building permits, an indicator of future construction, fell 17%. BoltgroupIt is one of the largest homebuilders in the country, reported that the cancellation rate jumped from 15% in the second quarter of this year to 24% in the third.

The public home builders that have reported their earnings so far have shown surprisingly strong results, but that’s because a lot of them are based on the backlog of homes that were contracted last spring. That was before mortgage rates topped 6% and then 7%.

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Now the builders are preparing for what’s to come next. Myers said his company’s balance sheet is incredibly strong right now, thanks to a backlog of homes sold at high prices, but he expected the market to be “ugly” by the start of next year.

“It’s definitely a hard landing for housing,” he said. “Any hope of a quiet downturn evaporated last spring, when it became clear that our clients accustomed to low mortgage rates were going to strike.”

Myers has been around during the recent housing crash, which was caused by a dysfunction in the mortgage market where almost anyone, qualified or not, can get a loan to buy a home. It caused a massive influx of housing, which depends almost entirely on speculative buying and selling by investors. Single-family housing starts fell by a staggering 80% from January 2006 to March 2009, but Myers notes that the transition has been slower than it is now.

“I think we’re seeing the most surprising market change of my career, and I’ve been in that place for a while,” he said. “I’ve never seen sales that just stopped, which happened to us in May.”


Barely six months ago, single-family housing starts were still up 10% year over year. That was before mortgage rates started rising so quickly. Going from a 10% annual increase in construction to a 19% decrease in that time frame is a historically sharp turn.

While sales of newly built homes are declining, prices are still higher compared to last year. Much of that has to do with inflated labor and material prices. A portion of price strength may be indicative only of the homes that are being sold, specifically homes that are more expensive. But that may soon change, too.

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Cheryl Palmer, CEO of Arizona Home Builders Taylor Morrison, which just reported solid earnings for the third quarter, said entry-level buyers are clearly struggling. But she also admitted that high-income buyers aren’t flocking to the door anymore.

“When we look at our movers and resort lifestyle buyers, they can definitely still buy, but emotionally, you have to have the confidence,” Palmer said on Friday. On CNBC “Mad Money”. Even at today’s rates, both our FHA and traditional buyers have a lot of space, but affordability doesn’t mean they have confidence, given everything that’s going on in the economy today. “

Palmer told analysts on the company’s earnings call that new orders fell “sharply” in September, and that the slowdown was being felt across a wide range of price points, geographies and consumer groups. As a result, Taylor Morrison is backing off land investment, slowing the pace of new construction starts and offering additional incentives to buyers.

Sales of newly built homes fell below pre-pandemic levels in September, and cancellations are now double what they were a year ago, according to the National Association of Home Builders.

“This will be the first year since 2011 to see a decline in single-family start-ups,” NAHB chief economist Robert Dietz said in a statement. “While some analysts have pointed out that the housing market is now more ‘balanced’, the reality is that the home ownership rate will decline in the coming quarters as high interest rates and persistently high construction costs continue to drive down the prices of a large number of potential buyers.”

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The supply of newly built homes remains high, unlike the existing home market, where listings are still scarce. NAHB reports that a quarter of builders are now slashing prices.

This is the great unknown. Prices are dropping for both new and existing homes, but analysts are divided on whether they will actually show declines year after year, and how broad those declines will be. Myers said he recently heard of a 20% drop in new construction prices.

“It sounds really tough, but when we were looking back, because our construction costs are going up so quickly, we just have to call in a little over a year to be 20% less than we are now,” Myers said. “So, to think, well, going back to 2020 doesn’t sound as crazy as a 20% price correction. But I think it definitely has to happen if we want to get back up to speed.”

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