There has been a lot said about a slowdown in the housing market that needs to be addressed. The sensationalized headlines forget to mention where we are coming from: June new home sales represented the best June dating back to 2007. When you hear about slower sales volume, it is important to remember that slowing is not the same as slow. Our Director of Economic Research, Ali Wolf, sifted through the data and highlights metro differences below.
Year-to-date new home contract statistics through June showed 53 of the 100 markets tracked in Zonda saw activity flat or higher compared to last year.
Affordability appears to be the biggest driver of the deceleration:
- Among the least affordable housing markets in the country (shown below), Los Angeles, Seattle, New York, Miami, and Sacramento had fewer new home contracts year-to-date. Of these markets, 70% have less than 5% of the active projects below $300,000; 40% have zero projects under that threshold.
- Looking at the actively selling new homes in the Los Angeles/Orange County metro, communities priced under $850,000 sold an average of 3.4 homes per month over the past three months. Of the new home supply, 48% of the communities are priced above $850,000 with an average sales rate of 2.2.
- Our team toured Seattle last month and the sentiment was consistent, “The market is slower, but it’s coming down from a feverish pace.”
- Sacramento is still an affordable alternative to the Bay Area, but with the average detached home list price at roughly $500,000, there are signs of buyer fatigue.
Markets still accelerating:
- Of the relatively expensive markets, San Diego, Las Vegas, San Francisco, and San Jose saw year-to-date contracts higher than last year. San Jose and San Diego had more active projects in June 2018 compared to June 2017, up 8% and 17%, respectively. In markets like San Francisco and San Jose, the median household income may underplay the actual earnings since some buyers in Northern California have stock options and other monetary benefits not included in their base salary.
- Tampa, Orlando, and Houston have between 50% and 60% of all the active projects below $300,000. These markets saw an uptick in contract activity over last year.
WHERE DO WE GO FROM HERE?
Cost challenges (land, labor, tariffs, mortgage rates, etc.) will be increasingly difficult to mitigate. While these forces are headwinds to the new home market, here are things to consider:
- Be strategic. There hasn’t been an overnight change in demand where people no longer want to buy homes, but as prices rise and incomes are stretched, buyers are becoming increasingly picky. This will force the industry to focus more on community and product strategy.
- Play up your strengths. The resale market is a great entry point for cost-constrained buyers, but often offers a less desirable product. The new home market needs to play up the desirable floorplans, cost savings from energy efficiency, and the ability to customize.
- Reconsider price appreciation expectations. The latest data from Zillow showed 14% of all listings in June dropped prices. These cuts were concentrated in high-cost markets for the highest price points. As headlines come out addressing a slowing in prices, remember that the Case-Shiller Home Price Index has posted 73 straight months of year-over-year gains. Sellers may need to get realistic with their pricing if homes aren’t selling as quickly as they’d like, and that’s actually OK.
- Keep in mind that the next recession will be different than the last. Our team has done extensive research on the recessions over the past 50 years. The Great Recession was a unique period in economic history that was systemic and pervasive. The restrictions put in place during the downturn have kept consumer and mortgage fundamentals in good health. While risks are undoubtedly higher than 12 months ago, when a recession hits, it will be different from the last one.
There are challenges, and the “build it and they will come” strategy will not be as easy as it has been over the past few years. Our industry will need to adapt to the affordability challenges and changing consumer preferences, but opportunities still exist. Our team is working across the country advising on the best way to minimize costs and right-size products. Contact us to discuss ways we can help you with your next project.