The recent housing boom is showing signs of being in a slump. Kayla Bruun, an economic analyst at Morning Consult, joined Cheddar News to discuss the downward trend in the market. Construction data released this week showed home sales and builds dropping as buyers feel the pressure of rising interest rates and costs. Demand for mortgages is also now the lowest it has been in 22 years, Bruun said. With these data points, Bruun predicts what will happen in the housing market over the next few months and what this will mean for buyers and sellers. 

Opening Bell

Home Building Rates and Mortgage Demand Dramatically Drop While Costs Rise

Welcome back to cheddar is opening bell new home construction slipped in the month of july with housing starts plummeting down 9.6% to an annual rate of 1.4 million units. The dramatic drop off comes as surging construction costs and higher mortgage rates. Just weigh on builder sentiment resulting in fewer new homes for more on this. I want to bring in kayla brune economic analysts at morning consult kayla new home construction that dropped to its lowest level in a year as confidence in the housing market has started to dwindle a little bit. Um That's the opposite of where I know we need to be in terms of where inventory levels are right now, given where inventory levels are right now. And even that sentiment, what does this tell you broadly about the state of the housing market right now? Is it truly showing a sign of pulling down? Yes, I would say that the construction data out this week is definitely yet another sign that the housing market is cooling down. And sort of as demonstrated by this homebuilder sentiment, we know that the quantity of home sales has been dropping as interest rates have been rising or at least elevated from a year ago. That's making it harder for potential homebuyers to buy a home so potential buyers are dropping out of the market and we see in our data that that's likely to continue. We continue to see fewer U. S. Adults saying in our surveys that they're planning to buy home over the next year. So we're really seeing a lot of signs that demand is slowing down for housing and that's now filtering through to building, where builders are adapting to these lower demand expectations in the coming months and and cutting back on new home construction, I want to dig into y a little bit more, you know, we're really seeing the lowest mortgage demand since about the year 2000. Um is that solely on just interest rates being higher or is the picture a bit more complex with interest rates, you know, where they're at inventory level, inventory levels where they're at and the fear of kind of a downer or even a recession looming. There's there's a combination of factors, certainly interest rates are one of them. I would also point to just the fact that inflation is so elevated, especially for a lot of your monthly essential things like groceries and gas gas has come down a little, it's still way up from a year ago. So as consumers are having to spend more on their monthly expenses, it's it's much harder to save for a down payment, which is a lot of the time savings is where that down payment comes from. So it's it's difficult for for potential homebuyers to actually save up enough money in order to buy a home, how long do you expect this downturn to last? And this pullback in demand. Do you think it continues into 2023 and maybe through 2023, it's going to depend a lot on some of the factors we mentioned, interest rates are still up, inflation is still up and I think really may be the most worrying sign for affordability as you alluded to a little bit is really the undersupply of single family homes. It's it's already, it's been supply constrained for a while when demand was strong. But even now as demand is cooling, prices haven't come down that much and that's really a sign that inventory remains low and there's really not enough supply to pull down these prices. The fact that construction is now slowing, that's a pretty long leading indicator given that it takes a while to actually build home so we can see that supply, we're not going to get relief on the supply side for a while. So even once inflation cools once interest rates come down, we're still going to be stuck with this low supply market for a while, I will say that there continues to be an increase in multi family housing. So what we may see is that more potential homebuyers aren't able to afford it. There's not enough supply, they're really going to be pushed into renting more. The picture that you paint is almost a stagnant housing market because if demand is cooling down and then home builders are pulling back as a result of that, people are scared to sell their homes because now their interest rate is potentially 5% or higher. It almost seems like the housing market stalls and that timeline there's just a big question mark in terms of how long before it ramps back up. Yeah that's that is another factor in addition to just fewer new homes being built. We're also seeing a pullback in in cellars. And I do think that some of that has to do with this this cooling sentiment and and more doubt around what's happening with the greater economy um tied to inflation. A lot of factors like that. So we do have a survey age month where we ask, are you planning to sell your home in the next 12 months? And we've seen a decline in cellars as well as buyers as they're expecting, it might be more difficult to sell their home. Plus they don't want to then in turn convert to buyers and have to grapple with the challenges that buyers are facing. Now to that end. You look at the National Association of Home Builders and they claim right now that the U. S. Is actually entered in a housing market recession so to speak due to the higher higher borrowing situation that we're in due to construction costs and inflation. Um just elevating the price of everything. What does it mean when the housing market is in a recession and a recession like now because this is certainly not the recession of oa and what we saw in the housing market of oh eight. Yeah we're seeing a rapid deceleration in demand, but as we talked about a little bit, it's a little strange that it's not filtering through the prices. So for those who are still, yeah, when you think back to 08, we actually saw like a pretty rapid devaluation of the homes. We're not really seeing that home values are still pretty elevated. They could cool somewhat. But so far we really haven't seen prices come down to the extent that demand has come down. So there is still value in owning a home if you already have one, it's really at that point of purchase that things are very much slowing down. Um but the home values remain pretty strong in about an hour and 15 minutes from now or less. That's gonna be 45 minutes from now. We're gonna get the National Association of Realtors, they're gonna report existing home sales from july. We noted earlier, five straight months. I think the expectation is we're gonna be six straight months of declines. Looks like economists are largely predicting that figure to fall by now 6% as opposed to 5.4%. Um The last read that we got, what are you expecting? I would agree that we were likely to see a continued decline. It's been just pretty dramatic and we're seeing it in our data to our data of consumers each month, just very steady deterioration of views on home buying and, and even as home ownership as an investment, just given how much of the cost would be going to financing rather than home equity, So I would definitely expect to see a continued pullback in demand and slower sales, given that I think the biggest question that I honestly have when I look at the housing market right now, because there's a lot that has me scratching my head to be quite frank with you is what then, is the catalyst for a rebalance or normalcy that we see in the housing market in terms of interest rates going higher, the cease and then, um, you know, prices, cooling, cooling back down. What creates that? Because I don't see any levers doing that right now to what we're talking about earlier, homebuilders pulling back sellers not wanting to throw their houses on the market demand kind of pulling back as well. What's gonna be the catalyst to change all this? I think one thing that's going to help one thing we can be sure of is that it's going to take some time just because a lot of the factors that are holding back the housing market from sort of a return to normalcy if we've ever had that these are things that are going to take time, there's many factors, inflation is still too high. Interest rates are higher than they've recently, that's going to take time to adjust back to normal, then of course, ramping up construction to work on supply. That's another thing that's going to take some time. Another thing I'd point to is that construction, the duration of construction timelines has been extended recently, a little bit from supply chain disruptions and things like that. So it's been taking longer to complete the homes that they've even started. This sounds like years to me, it sounds like potentially years. I know we're not trying to the timeline, it seems like cause it's really hard to gauge and have a crystal ball there, but all that you're talking about sounds like years for the housing market to kind of rebounds to again some sense of normalcy. Yeah, I would think of it as a it's not a speed boat, it's a slow moving tanker. The housing market just because construction takes a while, it will take some time. I don't know exactly how long One thing I did mention a little bit is that the rental construction is still, is still picking up so more units for multi family that could, that could help at least add more units to the market. The single family market is really where we're seeing this very tight supply um and and more rental units are needed because rental prices have been rising very quickly as well. So, there could be some relief in that segment of the market at least a little bit soon. On the rental side. Yeah, it feels like once inflation, maybe perhaps starts to come down and there is a big question mark on how long that's gonna take. Maybe that starts to be the catalyst for the domino effect that's needed to have the housing market kind of being more of a balanced state. Caleb really appreciate your time and your inside Caleb run economic analysts and morning consult.