A fistful of housing data this week essentially declared who is winning in the current housing market.
It’s certainly not homebuyers, who are picking through too-few choices to buy at still-high prices and elevated mortgage rates. It’s not sellers, many of whom are not even in the game. Those who are aren’t ahead, either, because they’ll eventually become buyers.
The winner — or winners? The homebuilders.
An imbalance in supply and demand — brought on by the down-then-up path mortgage rates took since the start of the pandemic — has been a boon to builders.
And they know it, too.
Confidence among builders finally pushed into positive territory this month, the first time in 11 months, according to the National Association of Home Builders. Expectations for current sales, and sales six months down the line, were also cheery.
“There is so little inventory available on the resale side that it’s pushing buyers to pay the premium for new as compared to resell because there just isn’t a lot out there that’s desirable for them,” KB Home Chairman, President, and CEO Jeffrey Mezger said this week on the builder’s investor call. “So we’re pretty pleased.”
KB Home (KBH) was the latest builder to turn in better-than-expected quarterly earnings and rosier guidance, following the same path as D.R. Horton (DHI), PulteGroup (PHM), Toll Brothers (TOL) and Lennar Corp. (LEN)
That enthusiasm has translated into more shovels in the ground.
Single-family housing starts in May jumped 18.5% from April to a seasonally adjusted annual rate of 997,000, according to government data released this week. Building permits for single-home construction rose to a seasonally adjusted annual rate of 897,000 units, up 4.8% from April.
“We have not seen that level in the 10 years prior to the pandemic,” Lawrence Yun, chief economist at the National Association of Realtors, told Yahoo Finance Live (video above.) “So builders are ramping up. Their profits are turning in. And there’s a financial incentive to produce more.”
Those homes are sorely needed, largely because current owners hold favorable mortgages. Why would you want to sell only to turn around and buy another, more expensive home, with a mortgage rate that’s twice as high?
You wouldn’t.
The numbers tell the story: Practically all homeowners with a mortgage have a current mortgage rate below 6%, Redfin reported last week. About 4 in 5 homeowners with mortgages have an interest rate below 5%, and nearly a quarter have a rate below 3%, likely when they refinanced during the pandemic when rates hit all-time lows.
So while the number of previously owned homes on the market did increase in May to 1.08 million units, that’s still below the pre-pandemic norm of 1.9 million homes, according to the NAR’s release on existing home sales. The total was the lowest count on record for the month of May.
Redfin, per new data, also found that the number of houses for sale in the US hit a new low in May.
“The tight existing inventory environment has been a tailwind for new home sales,” James Egan, a strategist at Morgan Stanley, wrote in a note to clients Tuesday. “In fact, new home sales made up the largest share of total transactions in the first quarter of the year since 2006.”
More good news for homebuilders: Egan revised his forecast for home prices, expecting no growth for the year versus his prior expectation of a 4% decline.
But there’s hope for potential buyers of existing homes: mortgage rates show signs of retreat.
Freddie Mac (FHL.SG) said rates have softened in the last three weeks — down to 6.67%. And this week Realtor.com revised its forecast for mortgage rates, predicting the average rate on the 30-year fixed mortgage will average 6.4% throughout the year, and hit 6.1% by end of year. That’s lower than its previous estimate of 7.4% throughout the year and 7.1% by year-end.
So would 6% be enough to revive the resale market?
“There’s no magic number because it’s probably different for every homeowner,” First American Financial Corp. Chief Economist Mark Fleming told Yahoo Finance. But “it’s likely that rates would need to be a lot closer to 5% than 7% in order to reduce the rate lock-in financial penalty for most homeowners.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv. Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz. Janna Herron is the personal finance editor for Yahoo Finance. Follow her on Twitter @JannaHerron.
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