Are home builders about to learn ...

… about supply and demand in a refresher course at the School of Hard Knocks.

https://ritholtz.com/2022/03/too-many-new-homes-for-sale/
... the lack of existing homes for sale and in the face of labor shortages and trouble procuring enough raw materials, appliances, garage doors, windows, etc…, builders have the largest amount of homes for sale in 14 years. As household formation is slowing to a crawl, and with now rising mortgage rates, hopefully, this leads to lower prices which would better position a 1st time buyer to purchase a home instead of having to rent where prices are rising double digits too.

… about supply and demand in a refresher course at the School of Hard Knocks.

I’m surprised to read this given the other information I have from friends, realtors, friends who are realtors, Facebook, and general reading.

Houses are going sometimes before the listing ink is dry; one recent one had 22 offers the first day, several sight unseen, almost all without contingencies. It’s nutso crazy out there in home buyer land, and while I expect interest rate hikes to cool it a little it seems unlikely that it’s going to fall off a cliff because of a quarter or half point rise. Heck, I’m the old fogey who bought my first when interest rates were 13% and there was no shortage of buyers even then.

I would think it would take a while to sop up the demand that’s been fueling a lot of this (including the corporate roll-ups, which are not insignificant), but then I don’t track inventory, etc. nor play that game anymore.

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Houses are going sometimes before the listing ink is dry; one recent one had 22 offers the first day, several sight unseen, almost all without contingencies. It’s nutso crazy out there in home buyer land…

Market for resales are “nutso,” yes, but the new build market is a different story. A sale is counted when a contract is signed for new build, at settlement when possession changes hands for resales. How many “sales” of new homes have been held up because of the supply chain not providing building materials on order in a timely fashion? Our Realtor has been in the market for something around 3 decades and has a team of Realtors working for her. She said that new build homes are a royal PITA, with contracts that protect only the seller from delays, imposing large fines on buyers if they can not sell their existing home to close on the new home at a moment’s notice. If you are a transferee and need to close on the new home by a specific time, good luck.

It’s so bad that the trend in our area is for Realtors to warn their clients away from new builds. IMO, new construction started to think too much of themselves and forgot that it takes 2 parties to sell a house. IMO it should improve as more homes are completed and then put up for sale, but the days of pre-selling a home before it is complete may be for the most part over.

IP

but the days of pre-selling a home before it is complete may be for the most part over.

Our local banker told us today that home mortgage applications have dropped significantly and they are seeing a dramatic drop in new home sales.

Jim

…mortgage applications have dropped significantly and they are seeing a dramatic drop in new home sales.

We’re not seeing that in my area (central NC). Maybe in many areas the supply is simply dwindling to the point that applications cannot be made and resultant sales cannot occur?

NPR had a story yesterday about how long it takes now to build new homes in many areas due to such things as the availability of windows or doors, appliances and lighting, not just lumber. In addition, the labor market in construction apparently has largely not come back from the 2007-2009 Recession.

Pete

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NPR had a story yesterday about how long it takes now to build new homes in many areas due to such things as the availability of windows or doors, appliances and lighting, not just lumber. In addition, the labor market in construction apparently has largely not come back from the 2007-2009 Recession.

I’m also in central NC. A friend is a homebuilder. He says getting almost anything for a new house build is difficult. They could build more homes if the building supplies were not constrained.

Let’s see what happens to demand if a Vietnamese EV companies brings 12k jobs to the area.

PSU

and while I expect interest rate hikes to cool it a little it seems unlikely that it’s going to fall off a cliff because of a quarter or half point rise.

Mortgage rates have risen by about 2% since last year. That typical 30-year fixed mortgage rate of just under 3% last spring is now just over 5% this week!

For real estate investing, I’ve always said that it is much better to buy when the price is low and the rates are high, than to buy when the price is high and the rates are low. Why? Because you can always refinance the loan to a lower rate, but you can never “refinance” the purchase price to a lower amount.

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Mortgage rates have risen by about 2% since last year. That typical 30-year fixed mortgage rate of just under 3% last spring is now just over 5% this week!

So that two-point rise is a

5/3 = 1.67 = 67% increase.

DB2

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For real estate investing, I’ve always said that it is much better to buy when the price is low and the rates are high, than to buy when the price is high and the rates are low. Why? Because you can always refinance the loan to a lower rate, but you can never “refinance” the purchase price to a lower amount.

For real estate investing I’ve always said ignore the trend and focus on the specific property. There are good deals to be had in what is an inefficient market.

The 20% gap up in rents sure helps a lot too, at least until they head back down. The general market trend is much less important than the specific property, however. Lot’s of factors involved in determining if a property makes for a good real estate investment, but that’s better handled at the Real Estate Investing board.

IP

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So that two-point rise is a

5/3 = 1.67 = 67% increase.

Technically true. But people don’t look at it that way. Instead they look at monthly payment and how it changes …

$300,000 for 30 years at 3% = $1264.81/mo
$300,000 for 30 years at 5% = $1610.46/mo

That’s a ~27% increase per month. And that’s pretty much what everyone cares about when it comes to buying a home.

And most people lump in taxes and insurance to figure a total cost of the home. So the percent increase overall is probably somewhat less than 27%.

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Instead they look at monthly payment and how it changes …

$300,000 for 30 years at 3% = $1264.81/mo
$300,000 for 30 years at 5% = $1610.46/mo

That’s a ~27% increase per month. And that’s pretty much what everyone cares about when it comes to buying a home. And most people lump in taxes and insurance to figure a total cost of the home. So the percent increase overall is probably somewhat less than 27%.

Good point. I think the most recent national average was a 23% increase, YoY.

DB2

I’ve always said that it is much better to buy when the price is low and the rates are high, than to buy when the price is high and the rates are low. Why? Because you can always refinance the loan to a lower rate, but you can never “refinance” the purchase price to a lower amount.

Isn’t this a bet on the future direction of rate moves? I would be reluctant to make that bet when rates have been sitting at historic lows for a decade.

<<I’ve always said that it is much better to buy when the price is low and the rates are high, than to buy when the price is high and the rates are low. Why? Because you can always refinance the loan to a lower rate, but you can never “refinance” the purchase price to a lower amount.>>

Isn’t this a bet on the future direction of rate moves? I would be reluctant to make that bet when rates have been sitting at historic lows for a decade.

No, not at all. It just adds some optionality. For ALL investments, you first have to make sure the investment itself makes sense at the time you are making that investment. Here’s a [very] rough example -

Case I - rates are 10%, house is $250,000, monthly expense (including mortgage) is $2500, rent is $2600, net positive cash flow is $100/mo.

Case II - rates are 3%, house is $350,000, monthly expense (including mortgage) is $2500, rent is $2600, net positive cash flow is $100/mo.

What I am saying is that despite the roughly similar overall situation between the two cases, I would prefer case I because it gives me the optionality of perhaps refinancing to a lower rate someday … if rates go down. But if rates do not go down, it is still a financially viable investment.

[NOTE: These are just very rough numbers to illustrate the idea, they are not real, and I didn’t bother using a mortgage calculator this time.]

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Technically true. But people don’t look at it that way. Instead they look at monthly payment and how it changes …

$300,000 for 30 years at 3% = $1264.81/mo
$300,000 for 30 years at 5% = $1610.46/mo

That’s a ~27% increase per month. And that’s pretty much what everyone cares about when it comes to buying a home.

And most people lump in taxes and insurance to figure a total cost of the home. So the percent increase overall is probably somewhat less than 27%.

I think they look at a mortgage payment relative to a rent payment for the same type of property. Given the rise in rents are comparable to the rise in mortgage payments, if they can do so people will buy. A 30 year FRM will lock in your P&I until YOU decide to modify it by refinancing or shortening the term by paying down principal. Above all, as a renter you have no control over your environment.

(NEXSTAR) – If you feel like you’ve been priced out of the housing market, you may not have any better luck in the rental market. Rent prices have been rising throughout the pandemic, and it doesn’t look like it’ll change anytime soon.

In a recent analysis, Realtor.com found the median rent for homes with two or fewer bedrooms rose by more than 19% from December 2020 to December 2021 in the 50 largest U.S. metro areas. The rent hike hasn’t been equally impacting every state in the U.S. Rent.com recently found some states saw rent rates jump by more than 50% from 2020 to 2021. https://www.newsnationnow.com/us-news/what-to-know-about-ris…

People have experienced loss of control with Covid and do not like it. Even with rising mortgage rates they will be primed to stretch as far as allowed to buy a property, even if not their dream house. We will see sales increase further.

IP

I think they look at a mortgage payment relative to a rent payment for the same type of property. Given the rise in rents are comparable to the rise in mortgage payments, if they can do so people will buy. A 30 year FRM will lock in your P&I until YOU decide to modify it by refinancing or shortening the term by paying down principal. Above all, as a renter you have no control over your environment.

This is true. I have also seen people compare buying versus renting DIFFERENT types of property. For example, a very common scenario is someone renting an apartment or a condo thinking about buying a house (SFH or semi-attached townhouse). The one thing that so many people overlook in that comparison is that in the apartment rental, most maintenance is included, but in the house you are responsible for all maintenance (including big things like replacing the roof every 15-25 years, A/C units, water heaters, other appliances, remodeling, etc).

The other thing that is often not properly accounted for in the other direction is that when you buy a home with a 15-year or 30-year mortgage, that means that in 15 (or 30) years, the P&I portion of the cost of housing goes away*. While in the rental case, nothing goes away other than the general changes in the market rents.

  • Of course with the insane pace of endless refinancing, including, and mostly, to pull cash out of the equity, perhaps this isn’t true anymore for some portion of home buyers. I’ve purchased one home, started with a 30-year mortgage, refinanced ONCE into a 15-year mortgage when rates were lower, and will be done with it in a few years (3-4?). Or I may just decide to pay it off for a quick guaranteed 4% annual return on my money.
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