The housing bubble is preparing to burst: the big boys are leaving, waiting for the reset

Biggest Single-Family Home Investors: “We need to be patient and allow the market to reset.”

By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.

We are now getting all kinds of comments from housing industry insiders and large institutional investors in single-family homes. They talk about it in their phone calls.

American Homes 4 Rent is one of them. The company was founded during the Housing Bust and purchased tens of thousands of single-family homes which it then rented out. In addition to buying houses, in recent years she has started building her own housing estates with only rental houses, purpose-built for rental. The company has received huge amounts of funding over the years from investors, including when it went public via an IPO in 2013.

So American Homes 4 Rent, on its earnings call last week, said a lot of the things we’ve seen in the data before. And data from all directions has been pointing to a housing slowdown for months.

There is now a huge supply of new homes for sale, at all stages of construction, more than 9 months supply in total, according to the Census Bureau. In terms of home counts, in June there were 463,000 new single-family homes at all stages of construction for sale, the highest since May 2008, and up more than 30% from a year ago. .

Cancellation rates for homebuilders reached almost 18% of their total contracts signed in July, more than double from earlier this year and last year, according to data from the consultancy firm. in real estate John Burns. And that cancellation rate was even worse than the cancellation rate in April 2020, during the lockdowns.

The Census Bureau reported that sales of new single-family homes plunged 17% from a year ago and are barely above the April 2020 lockdown low.

The National Association of Home Builders reported that its foot traffic index of potential new home buyers plunged in June and has now fallen to levels not seen since 2014, except during the March and April shutdowns.

Traffic is an indication of buyer interest, and buyers have lost interest – at least at these prices.

Homebuilders responded by lowering prices: 13% of builders cut home prices in June to boost sales “and/or limit cancellations,” according to the National Association of Home Builders.

And based on census data, new home prices fell 12% in the two months of May and June as builders try to sell their accumulating inventory.

Same thing with houses, condos and townhouses that a landlord or investor is trying to sell. Estate agents have been complaining for months about the drop in foot traffic and visits.

National single-family home sales fell nearly 13% year over year in June; and condo and co-op sales fell 25%, according to the National Association of Realtors. This is the 11th consecutive month of declining year-over-year sales.

Just one example of what to expect: Pending sales in California — an indication of what future closed sales might look like — have plummeted by 40%, according to the California Association of Realtors.

The decline in sales accelerated, amid mortgage rates soaring to around 5.5%, even as stocks suddenly jump out of the woodwork.

The supply of second-hand homes for sale jumped to three months, the highest since August 2020, and up 20% from a year ago. Supply nearly doubled from January’s low. The bidding wars are gone.

In some major markets, unsold homes for sale more than doubled in June compared to June of last year, and there are many major markets where listings jumped 50% or more.

Thus, the pent-up supply suddenly appears in the market. No surprise there. We knew this would happen, because it always happens when the housing market turns.

A lot of people have bought a house in the last two years without selling the previous house, and they now have two or three houses, and they’re not renting them out.

The sole purpose of not selling the houses they moved from was to increase the huge price increases with their highly leveraged investments. And now that the price hikes are ending, they’re trying to sell their vacant homes, and they’re putting them on the market without having to buy another house to move into. And the so-called “housing shortage” simply disappeared.

It happens every time. For years it’s been claimed that there’s a housing shortage, and suddenly there isn’t, and there’s plenty of supply, and new offers keep coming out of the woodwork just when buyers have evaporated. All it takes is a market downturn.

The median price of previously owned homes across the country rose again in June. But in some markets, prices have already fallen substantially and are down year on year. This includes the San Francisco Bay Area, where housing prices fell year over year in three Bay Area counties, namely San Francisco, San Mateo, which is part of the Silicon Valley, and Contra Costa.

Sellers are always trying to get those ambitious prices, but many buyers say, forget it. And that’s why there’s no meeting of minds, and sales don’t happen if buyer and seller are too far apart.

In other words, price discovery continues where sellers need to find out what price they can actually sell their home for. And in the process, sales dip, as we see, and sales will continue to dip until sellers know where the buyers are, and the buyers are much lower.

Sellers are responding: Price cuts were up 50% in June from May and nearly doubled year over year, according to data from realtor.com.

This is part of price discovery: slashing prices and slashing prices further until a sale occurs.

These price cuts are a reset – after the era of those ridiculous bidding wars. More and more sellers are facing a new reality: prices have to go where the buyers are, and the buyers are somewhere, but they are much lower.

So American Homes 4 Rent on its earnings call last week said a whole bunch of interesting things about how it sees this housing market.

During the conference call, he said he had reduced his purchases of single-family homes by 80% compared to the start of this year, to “give the market time to recalibrate and stabilize”.

He said that although interest rates have risen, house prices have not yet come down enough.

He noted that inventories of previously owned homes and new homes are increasing, and “the amount of time they’ve been there is much longer.”

He said: “We are starting to see price discovery happening. But we are still at the beginning of this process.

He said he’s been getting a lot of calls he wasn’t getting before, from owners of small portfolios of rental homes and even from national builders with excess inventory.

But he said there was a gap between where he expected to bid and what the sellers had in mind. These sellers still want prices that “you would have seen in March”. And he said, “so people realize that the market is changing, and they see if they can still make a deal based on the old price.”

And he said there was “still time needed for these properties to be re-evaluated in the current price arena with current interest rates.”

And he said, “the price we see today is still the March price and that needs to be adjusted.”

In other words, price discovery. Sellers are trying to find out where buyers are but haven’t gone down far enough yet.

And the CEO said, “Rates are going up and prices are going down. It takes time. We see that the stocks are increasing. We’re seeing the length of time houses are on the market getting longer. We are seeing an increase in domestic homebuilder inventories.

He said: ‘It’s only been in the last two to three weeks that we’ve really seen a drop in prices.’

He said, “It’s more driven by the west coast, but not entirely. And we’re seeing some of those declines in the 10-15% range in markets like Seattle and Denver. »

He said, “we have to be patient and allow the market to reset.”

And he said, “It all depends on the fact that the capital cost to us as well as to the individual owner has changed, and that has to be reflected in the market.”

He said: “You can have people on the sidelines, but they also have to be able to afford the offer. And when you think about rising interest rates and go for a 3% to 5.5% home loan, that’s a significant increase in payment, which reduces affordability.

And he said, “So we still have a good amount of price discovery and it takes time for the markets to stabilize. But they are volatile.

So, in response to this environment, the company has reduced its purchases by 80% and is waiting for prices to drop and the market to reset.

And these are the benefits. They’re not swayed by emotions or, you know, life stages, like many homebuyers are. They just view these homes as an investment, and these homes don’t make sense at today’s prices with today’s interest rates, and so these big institutional buyers with huge resources are largely walking away from the market.

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