Sluggish isn’t a term we’ve associated with housing for a few years, but that was the characterization used by FreddieMac on July 21, 2022. The company wrote, “Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand. As a result of these factors, we expect house price appreciation to moderate noticeably.” Few economists are expecting an implosion of home prices, though we are seeing sellers drop their prices in the places that were the most popular during the Pandemic. According to Redfin, the cities leading the price drops were Provo, Boise, Salt Lake City, Sacramento, Ogden, Tacoma, Denver, Portland, Indianapolis and Philadelphia.
D.R. Horton (a publicly traded American home builder) advised that the company’s cancellation rate was 24% in the 2nd quarter of 2022, up from 17% a year ago. On July 11, 2022, Redfin warned that 60,000 home-purchase agreements were torn up in June. At 14.9%, this was the highest percentage of buyers backing out of deals since 2017. Many potential home buyers are taking advantage of inspection and appraisal contingencies to run for the exits. Some are forced to walk away when they no longer qualify for a loan or can’t come up with a down payment.
A jump in mortgage costs, combined with the highest home prices ever, are the culprits in the declines. On January 7, 2021, mortgage rates were at a historic low of just 2.65% for a 30-year fixed. In June of this year, rates soared above 6% for the first time since the Great Recession. The current rate is 5.54%. Rates could jump again after the FOMC meeting on July 26-27, 2022, when the Federal Reserve Board governors are expected to turn up the heat on the federal funds rate by another 75 basis points.
Housing affordability is a nationwide crisis. Home prices soared to a new record in June, to $416,000 for the median existing-home price. That’s up 13.4% from the same time last year.
Rent is even more expensive than a home purchase. According to the press team at the National Association of Realtors, in May of this year, 25- to 40-year-olds were spending 50% of their income on rent, while homeowners of the same age were spending just 23%. Household savings are getting burned up by astronomical housing, transportation and medical costs. All of the savings from the Pandemic support are gone.
Economists are mostly in agreement that higher interest rates are needed now and quickly to combat inflation, even though that is likely to spark a recession. The justification is that there will be some pain while we take the medicine necessary to fix the economy. (Of course, the pain always falls on the middle and lower classes.) Financial indicators are ringing the alarms that the U.S. will indeed hit a recession. We’ll know on July 28, 2022 at 8:30 am ET, when the 2Q 2022 GDP is announced, if it has already arrived.
Will home prices stay buoyant, or will they sink in a recession? As mentioned above, prices are already softening, particularly in the pandemic hot spot regions. However, so far this is more a moderation of an unsustainable escalation of prices, rather than a panic drop.
Homeowners will jettison a lot of goods and services in order to keep their home. However, when a quarter or half of our income is eaten up by the mortgage, homeowners are vulnerable – particularly if the labor market weakens. There is also a risk that some buyers may have taken on more home than they could really afford, or purchased a 2nd home with a business model that isn’t panning out. About a third of the purchases were from first-time buyers in June, while 16% of home purchases were from investors and 2nd home purchasers, according to the National Association of Realtors. There has been a lot of chatter about people buying new homes with the hope of getting rich on AirBnb short-term rentals.
Joblessness and weakness in hospitality businesses are hallmarks of recessions. The Feds want to keep the labor market strong. However, we are already starting to see some layoffs. Tesla announced that they are reducing their workforce by 3.5%. Ford is letting 8000 workers go. It’s important to note that the labor shortage is concentrated in lower-paying jobs – not the kind of employment that can keep people in their new homes. Few economists are predicting a Great Recession type drop in home prices, largely because the speculation is lower and underwriting standards are higher this time around. However, the risk of home prices plunging increases if unemployment rises.
Beazer Homes reported revenue in the 2nd quarter that was 7.3% lower than last year due to a 22.3% decrease in home closings. As reported at the top of the blog, D.R. Horton saw cancellations of almost 25%, but was still able to report revenue that was 20.7% higher than last year, largely due to the price increases. With interest rates and mortgage rates predicted to keep rising, this could stifle the performance of home builders in 2022 and 2023.
Many home builders have a lot of debt and a low credit rating. Some may not be fully factoring in the cancellations into their forward projections. For instance, in the 2nd quarter 2022 KB Home earnings call, chairman and CEO Jeff Mezger told analysts, “We believe the factors underlying long-term demand continue to be healthy, particularly with respect to demographics and the work-from-home trends, coupled with an ongoing under-supply of new homes and low existing home inventory.”
Meanwhile, we’re starting to see insider selling at some of the publicly traded home builders. Jeff Mezger has sold almost $40 million in KB Home stock over the past year, as has Toll Brothers co-founder and chairman emeritus Robert Toll.
Email info@NataliePace.com if you’d like to receive a copy of our Home Builders Stock Report card.
High mortgage rates, high home prices, unaffordability, FUD (fear, uncertainty and doubt) and low cash reserves are limiting the number of buyers on Main Street these days. While home prices continued to soar in the first half of 2022, that is not expected to be the case going forward. Don’t purchase hoping for last year’s Return on Investment. If you’re selling, the right price could be key to closing the deal – particularly with the cancellation rates we’re seeing. Gone are the days of multiple bids above the asking price.
If you’re considering a purchase, be sure to check out my housing webinar and podcast before entering the marketplace. There are few things worse than buying more home than you can afford when prices are at an all-time high. First-time (inexperienced) buyers are more vulnerable to this devastating money mistake. The equation has to include more than just trying to avoid high rent costs. (There are solutions for all of this that don’t lock you into buying a home at an all-time high price and being a slave to your mortgage for the next decade.)
If you’re invested in REITs, now is a good time to be sure that you are not vulnerable to capital loss. Remember: the higher the dividend, the higher the risk. This is an industry that I’d underweight in my portfolio. (Remember that we also are overweighting an additional 10-20% safe in our sample pie charts.) We teach how to protect wealth from recessions at our Investor Educational Retreats. Email info@NataliePace.com to learn more.
If you're interested in learning 21st Century time-proven investing strategies for protecting your wealth and managing the bear market from a No. 1 stock picker, join us for our Oct. 8-10, 2022 Financial Freedom Retreat. Email info@NataliePace.com or call 310-430-2397 to learn more and to register. Click on the banner ad below to discover the 18+ strategies you'll learn and master. Get the best price when you register with friends and family. Register now to access your free 4-part Protect Your Wealth Now webinar that will get you started immediately.
Natalie Wynne Pace is an Advocate for Sustainability, FinancialLiteracy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.