Predictions On Prices And Opportunities For Buyers
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Anytime Ivy Zelman, CEO of Zelman & Associates, appears in an interview (or webinar) to discuss the current housing market, we tune in.
So, of course, when Zelman joined two CNBC “Squawk Box” hosts for a conversation on the recent drop in rates, her comments became topic number one on Tuesday’s Hot Sheet.
If you tuned in, or you’re a Hot Sheet regular, you know the high regard in which Byron Lazine holds Zelman and her insights into the market.
She’s one of a handful of people who predicted what was going on during the lead-up to the Great Financial Crisis. She saw the housing bubble before everybody…She has some strong statements about the state of new construction right now and what opportunities buyers have in that sector. Byron Lazine
“IT’S A BUYER’S MARKET FOR NEW CONSTRUCTION”
The CNBC host leading the interview began with a question on home prices, asking Zelman, “Do you see any early signs of what direction that’s going to play out?”
Here’s how Zelman responded:
Well, at this point, I’d say that home prices aren’t likely to go higher. I think they’re going to continue to decelerate, although the drop in rates had a bit of a mixed result. It’s a little early to say. But remember, mortgage rates were over 7% late April and the first half of May, so it is about 50 basis points down, which certainly helps.
A good rule of thumb is that a 25 basis point decline in rates is about equivalent to a 3% decrease in price. But today, I still think that it’s a buyer’s market, and looking for opportunities for incentives from those that are buying new construction and mortgage rate buy-downs. Ivy Zelman - CEO of Zelman & Associates
In his review of Zelman’s statements, Byron added what he’s seeing in southern Florida right now, where sellers are having to come to terms with the reality that a price reduction is likely necessary to get their home sold within a brief timeframe.
Prices are not just stabilizing in some areas, they are going to start going down…you’re already seeing that in a couple of markets. You’ll see more of that over the next six months, and you’ll see more discussion start to ramp up around that. Byron Lazine
The CNBC host then asked Zelman to clarify whether she believes the current market favors buyers or sellers.
Well, buyer’s market for new construction in that there are great deals. For example, I talked to a builder late Friday to say, ‘Hey, did you see any benefit from the drop in rates?’ And they said, ‘No, but we were able to buy 3.99% commitments for mortgage rate buy-downs,’ which is definitely a good deal for a consumer.
So, in the new construction market, a 3.99% mortgage rate is pretty attractive and probably gets you back to sort-of normalized affordability. The new market is about 10% above trendline; [the] existing market is still about 20% above trendline, even if you account for the drop that we’ve seen in rates. Ivy Zelman - CEO of Zelman & Associates
THE STOCK MARKET’S RESPONSE TO RATES
The next question had to do with stocks, which took a hit last week.
“What about…stocks, which were under pressure last week? I’m curious, what are their catalysts? What drives them? People have now pointed to buy-backs… How are you thinking about them?”
Zelman’s response focused on the durability of homebuilder stocks
Well, the builders right now are definitely still at an absolute basis seeing pretty healthy absorption. I think, because of the pressure on price, we’re going to see a normalization of gross margins, which we think should be reflected in analysts’ outlooks.
With that said, if we see further pressure than people are counting for, the stocks might be under pressure in the near term…I think people are optimistic they can weather any significant downturn better. But I don’t really see a catalyst in the near term unless rates were to drop another 50-plus basis points to get us back to trendline for affordability. So, I’d be a little bit leery that that comes to fruition today. But if it does, in fact, come to fruition, I think the stocks will start to react positively. Ivy Zelman - CEO of Zelman & Associates
At this point, the second CNBC host followed up with a question on the advantage of new construction in some markets compared to others—and relative to the growth in existing home supply.
“Yeah, that’s a tricky equation, I guess, Ivy, because if rates go down that far, who knows what we’re talking about in terms of where unemployment has to get to, maybe for the market to price that in. And at the same time, we have seen existing inventories rise to a degree here. So, are we moving the equilibrium point, here, between the advantage of new construction versus existing?”
Zelman’s response:
Well, you know, that is a good point. Nationally, the last data point showed that inventories were up almost 25%. A lot of the Florida markets are seeing the greatest increase. Tampa is up over 90%. But across the board, I’d say 70-80% in most of the MSAs*. Denver is up. San Diego is up. And because of that, it becomes a more competitive market for builders to definitely have less advantage than they had when they were the only game in town.
I don’t know that across the United States, though, we could say that. In the Northeast, in the Midwest, inventories are just up modestly. So, I still think there’s an advantage where there is new construction in those markets, which is definitely less plentiful but still an advantage for the new construction area in those parts of the country. Ivy Zelman - CEO of Zelman & Associates
The question on unemployment is a timely one since many potential homebuyers have put their plans on hold in the hopes that rates will fall further over the next few months. The only way that happens is if more Americans lose their jobs.
I don’t think enough people really take that into consideration. ‘I’m gonna wait for rates to come down.’ If you’re looking for it in the short-term, you’re waiting for unemployment to go up fast. You’re waiting for something bad to happen. And that’s the conversation that I think buyers are just not getting enough of the time…They end up driving a lot of the decisions too often as opposed to getting the education from their agents.
Agents of change believe in closing the knowledge gap between what the reality is and where the consumers are at right now. And that’s a conversation that I think needs to take place with consumers to help them better understand. Byron Lazine
Key Details:
- Ivy Zelman appeared on CNBC’s Squawk Box to discuss the current housing market dynamics, including the impact of the recent rate drop on builders and favorable conditions for buyers in new construction.
- Byron Lazine breaks it down on the Hot Sheet, highlighting conversations agents should be having with consumers about mortgage rates.
Posted by Sarah Lentz | Aug 15, 2024 | Housing Market
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