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Several housing metrics due this week are expected to show signs of a slowdown. That sentiment has also been echoed in recent comments from real estate technology companies on earnings calls.
Affordability has grown in importance as prices keep rising and mortgage rates have climbed to the highest point in more than a decade. The average rate on a 30-year fixed mortgage has increased more than two percentage points since its last reading in 2021 to 5.3% last week, according to Freddie Mac data, its highest since the summer of 2009.
Affordability is largely above its long-term average, according to RBC Capital Markets analyst Mike Dahl, who tracks the metric by calculating the monthly payment for an existing home as a share of an area’s median income. The analyst says affordability will likely stay strained, too, as the number of buyers remains stronger than the inventory of homes available to purchase.
Investors will get the latest indication of how rising prices and mortgage rates have affected demand this week. April housing starts and permits, two gauges of new-home construction released by the Census Bureau and Department of Housing and Urban Development, are expected on Wednesday. On Thursday, the National Association of Realtors will release last month’s existing-home sales data.
All of the metrics due this week are expected to slump on a seasonally-adjusted basis compared with the month prior. Consensus estimated tracked by FactSet expect April permits to fall to a seasonally-adjusted annual rate of 1.8 million from 1.87 million in March, while housing starts are expected to be 1.77 million in April, down from about 1.79 million the month prior.
Existing-home sales are forecast to fall to a seasonally-adjusted annual rate of 5.6 million, down from 5.77 million in March. Pending home sales, a leading indicator of home-purchase activity compiled by the trade group, declined 1.2% in March.
Meanwhile, a spate of recent earnings releases from real estate technology companies
(Z) offered clues as to what’s to come for the housing market.
Here are three takeaways for investors:
1. The Housing Market Is Cooling
The housing market remained hot throughout most of the pandemic, with demand to buy a home largely outstripping limited supply. Now, as home affordability concerns take center stage, companies said they expect the market to become less frenzied.
“What we’re managing against is an assumption that the housing market will cool toward the back half of the year,” Carrie Wheeler, Opendoor’s CFO, said on an earnings call earlier in May. Wheeler said the company expects home-price appreciation to slow gradually as interest rates rise and home affordability comes under pressure.
Rising mortgage rates have added up for buyers. An analysis of mortgage applicants by the Mortgage Bankers Association found that the median mortgage payment applied for nationally was $1,736 in March, an increase of $387 from one year prior.
Zillow also anticipates coming changes in the housing market. In a May 9 report, Zillow senior economist Jeff Tucker said the housing market’s “run of records is likely to end soon, as the housing market passes an inflection point.” Coming changes, like slowing home-price appreciation and additional home inventory, would be favorable for buyers, Tucker wrote.
But a slowing market doesn’t necessarily mean that a crash is coming. “While affordability has waned with increasing prices over the last two years, there is currently little risk of forced selling given the strength of consumer balance sheets,” said Opendoor’s Wheeler.
2. But How Cool It Gets Is Anybody’s Guess
At least for now, there’s still a supply issue.
“We are still inventory constrained,” said Redfin CEO Glenn Kelman on an earnings call earlier this month—but the imbalance between demand and supply isn’t the same everywhere. “There are only a few markets like Seattle, Denver, Tacoma, parts of California, where homes are sitting on the market, and they’re only sitting just a little bit.”
The most recent existing-home sale forecasts from Fannie Mae, Mortgage Bankers Association, and the National Association of Realtors call for existing-home sales to fall this year, with 2022 sales predictions ranging from about 5.6 million through 5.9 million. That’s down from the roughly 6.1 million homes sold in 2021, but still above the prepandemic level of 5.34 million in 2019.
Industry headwinds—like low levels of inventory and rising interest rates—are making it harder for home shoppers to buy, Rich Barton co-founder and CEO of Zillow, said. “Everybody is kind of commenting on just what a weird market it is with such a high supply-demand or demand-supply imbalance, that hasn’t actually righted itself for quite some time,” Barton said. “The industry is expecting it to do so, but the underlying dynamics, the demographic supporting more and more demand coming online are strong.”
“It isn’t all doom and gloom, but it’s foggy,” he added.
Data from this week’s economic releases will likely help paint a surer picture—and allow investors to measure these company statements against the housing market more broadly.
3. Some Pandemic Trends Are Still in Play
The widespread adoption of work-from-home policies early in the pandemic contributed to increased competition and price growth in certain markets.
The share of workers who teleworked because of the pandemic has dropped recently, falling to 7.7% in April from 10% in March, according to the Bureau of Labor Statistics. But the ability of some workers to work from anywhere remains a force in the housing market, according to Redfin’s CEO.
“It used to be that when housing became less affordable, someone in San Francisco would look further afield by commuting 60 minutes, 90 minutes,” Kelman said. “But now there is no commute.”
Prospective buyers are now looking in multiple markets at once, the CEO said during the company’s earnings call. “As interest rates go from 3% to 4%, to 5% and beyond, instead of being able to afford less house, [buyers] go to a place where home prices are lower,” Kelman said. Demand has been shifting to markets in the South and Sunbelt from coastal markets, the company said.
Write to Shaina Mishkin at [email protected]