Housing bubble woes: Homebuilders slash prices, ramp up incentives, amid plummeting buyer traffic, soaring cancellations, Holy-Moly mortgage rates

To support sales, 24% of homebuilders cut prices, others tried mortgage rate buyouts or other incentives.

By Wolf Richter for WOLF STREET.

“Buyer traffic is low in many markets as more consumers sit on the sidelines as high mortgage rates and house prices put buying a new home 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 declining market” and a “soft market”, more than 50% of manufacturers said they used incentives to support sales or reduce cancellations – more on these cancellations in a moment . These incentives, the NAHB said, include “mortgage rate buyouts, free amenities and price reductions.”

Price reductions: The percentage of homebuilders who said they had cut prices rose to 24% in the September survey, from 19% in August and 13% in July.

Price reductions and the use of mortgage rate buyouts (where the builder subsidizes the mortgage) are counteracting some of the effects of soaring mortgage rates – now above 6%. When the market starts to freeze, price cuts are needed because homebuilders can’t sit on the homes they’ve started or completed. They have to sell them somehow.

Confidence among single-family homebuilders fell again in September, the ninth consecutive month of declines, “as the combination of high interest rates, continued disruptions in the building materials supply chain and high prices housing continues to weigh on affordability”. ,” the NAHB Report said.

With today’s index value of 46, the NAHB/Wells Fargo Housing Market Index is now lower than it was in May 2006, on the way to the housing crisis.

Homebuilder confidence by region:

The NAHB Regional Housing Market Index plunged the most in the West (red line in chart below), after rising further in the first three months of 2022. This is a stunning drop from March (91), when homebuilders were still expressing huge confidence, and six months later now at 34, the lowest since June 2012, as the West emerged from the housing crisis.

The index fell the least in the South (green line), which is the only region with a reading still above 50, which marks the index’s neutral line. But even in the South, sentiment has fallen sharply. The graph shows from December to September:

Traffic from potential buyers deteriorated further.

The potential buyer traffic index dropped to 31. Traffic is a sign of interest among potential buyers. And many of them have lost interest in these awards. Hence the price cuts and other incentives to keep them watching and snacking:

The NAHB Current Sales Index fell for the seventh month in a row, to 54. That means slightly more builders rated current sales as “good” rather than “bad” (50 is even).

The NAHB Future Sales Index fell to 46, the lowest since 2012. That means slightly more automakers rated future sales as “poor” rather than “good.”

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

Cancellations have surged.

In the Southwest, August homebuilder cancellation rates hit 36%, up from 9% a year ago. In Texas, the cancellation rate jumped to 31%; in Northern California, it jumped to 29%, according to the survey of homebuilders conducted by John Burns Real Estate Consulting. These are huge cancellation rates.

In the United States, the homebuilder cancellation rate in August rose to 19%, the highest in years, from 17.6% in July, and from 16.5% during the worst month of lockdown, and against 7% in August 2021 (graph through Rick Palacios Jr.director of research at John Burns):

I have previously reported on The Boots-on-the-Ground Observations of 21 Homebuilders on the housing market they face, also based on John Burns’ Survey of Homebuilders. For example, one Phoenix builder said, “Incentives continue to grow, with some communities pushing 20% ​​off total discount packages. The good thing is that there is light at the end of the tunnel to improve build cycle times. The negative point is that there will be no customers on the other side of said tunnel.

Holy-moly Mortgage Rates.

The average 30-year fixed mortgage rate rose to 6.42% today, as measured by Mortgage News Daily, which tracks mortgage rates daily.

Freddie Mac’s weekly measure, released last Thursday and mirroring mortgage rates earlier in the week, hit 6.02%, the highest since November 2008. It has now more than undone the ‘Fed pivot’ mirage. over the summer when it briefly dipped to 4.99%.

“Holy-moly mortgage rate” is becoming a technical term based on what potential buyers say when they see the mortgage payment for the home they are trying to buy at these prices and rates.

Home Builders Inventories, after the summer rally that ended in mid-August, are down 30% to 44% year-to-date (data via Y-Charts):

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