September 20, 2022 | Housing Bubble Woes: Home Builders Cut Prices, Pile on Incentives, amid Plunging Traffic of Buyers, Spiking Cancellations, Holy-Moly Mortgage Rates

“Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households,” according to the National Association of Home Builders this morning regarding its survey of home builders.

Incentives: “In another indicator of a weakening market,” and a “soft market,” over 50% of the builders reported using incentives to prop up sales or reduce cancellations – more on those cancellations in a moment. Those incentives, the NAHB said, include “mortgage rate buydowns, free amenities, and price reductions.”

Price reductions: The percentage of home builders who reported cutting prices jumped to 24% in the September survey, up from 19% in August, and up from 13% in July.

Cutting prices and using mortgage rate buydowns (when the builder subsidizes the mortgage) counteract some of the effects of soaring mortgage rates – now over 6%. When the market begins to freeze over, price cuts is what needs to happen, because home builders cannot just sit on the houses they have started on or have completed. They must sell them one way or the other.

The confidence of builders of single-family houses fell again in September, the ninth month in a row of declines, “as the combination of elevated interest rates, persistent building material supply chain disruptions, and high home prices continue to take a toll on affordability,” the NAHB report said.

With today’s index value of 46, the NAHB/Wells Fargo Housing Market Index is now below where it had been in May 2006, on the way down into the Housing Bust.

Home builder confidence by region:

The NAHB’s regional Housing Market Index plunged the most in the West (red line in the chart below), after still rising during the first three months of 2022. This is a stunning plunge from March (91), when home builders still expressed enormous confidence, and six months later, now at 34, the lowest since June 2012, as the West was coming out of the Housing Bust.

The index dropped the least in the South (green line), which is the only region with a reading still above 50, which marks the neutral line in the index. But even in the South, sentiment has been falling sharply. The chart shows from December through September:

Traffic of prospective buyers deteriorated further.

The index for traffic of prospective buyers dropped to 31. Buyer traffic is a sign of interest among potential homebuyers. And many of them lost interest at these prices. Hence the price reductions and other incentives to get them to look and nibble:

The NAHB index for current sales has dropped for the seventh month in a row, to 54. This means that slightly more builders rated current sales as “good” rather than “poor” (50 is even).

The NAHB index for future sales dropped to 46, the lowest since 2012. This means that slightly more builders rated future sales as “poor” rather than “good.”

But then, what do these “sales” even mean, when 20% or 30% of those sales suddenly get cancelled?

Cancellations jumped.

In the Southwest, home builder cancellation rates in August spiked to 36%, up from 9% are year ago. In Texas, the cancellation rate spiked to 31%; in Northern California, it spiked to 29%, based on the home builder survey by John Burns Real Estate Consulting. These are huge cancellation rates.

Across the US, the cancellation rate among home builders in August jumped to 19%, the highest in years, up from 17.6% in July, and up from 16.5% during the worst lockdown month, and up from 7% in August 2021 (chart via Rick Palacios Jr., Director of Research at John Burns):

I previously reported on The Boots-on-the-Ground Observations by 21 Home Builders about the Housing Market They’re Facing, also based on John Burns’  home builder survey. For example, a builder in Phoenix said: “Incentives continue to grow, with some communities pushing 20% in total discount packages. The positive is there’s light at the end of the tunnel for improving build cycle times. The negative is there won’t be customers on the other side of said tunnel.”

Holy-moly mortgage rates.

The average 30-year fixed mortgage rate rose to 6.42% today, according to Mortgage News Daily’s measure, which tracks mortgage rates on a daily basis.

The weekly measure by Freddie Mac, released last Thursday and reflecting mortgage rates earlier in the week, hit 6.02%, the highest since November 2008. It has now more than unwound the “Fed pivot” mirage over the summer, when it had briefly dipped to 4.99%.

“Holy-moly mortgage rate” is becoming a technical term based on what potential homebuyers say when they see the mortgage payment of the house they’re trying to buy at these prices and rates.

Homebuilder stocks, after the summer rally that ended in mid-August, are down between 30% and 44% so far this year (data via YCharts):

Wolf Richter September 20th, 2022

Posted In: Wolf Street

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