In mid-June, Fed Chair Powell used a phrase when addressing reporters that caught a lot of attention at the time. He made clear that the central bank was carefully watching housing prices and residential investment, and then said this: "I'd say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again."
He added that the Fed world work "in a way" so the housing market "settles in a new place and housing availability and credit availability are at appropriate levels." Then he said thank you and left.
Ten weeks later, there is little sign this is happening. John Burns Real Estate Consulting takes a harder-edged view, saying that to address inflation, "the Fed is throwing the housing market 'under the bus'" across the board with rising rates.
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First, borrowing costs have nudged many investors, including house flippers, out of the market. "Our 2Q22 survey of fix-and-flip investors across the country, which was fielded in mid-July, revealed that 35% of flippers saw at least half of their deals fall through due to the rise in financing costs," they wrote.
You might expect house flippers to be small investors, but the big SFR operators are also pulling back, according to the firm. For example, during the American Homes for Rent Q2 earnings call, CEO David Singelyn said, "It is a statement that we need to be patient and allow the market to reset, and those opportunities will be available to us as we move forward. It's all about the fact that capital cost for us as well as for the individual homeowner has changed, and that's got to get reflected in the marketplace. And it's getting there, but it's not there yet."
Private home construction is down. Census Bureau figures showed privately-owned housing starts in July down 9.6% from the revised June estimate and 8.1% lower than July 2021 (although, as often is true with Census data, there is enough statistical uncertainty that the agency can't say for certain if any change actually happened).
That has spilled over to affect land deals, according to the firm. Also multifamily, which has been one of the ongoing bright spots in the industry. However, as the report noted, "John Burns recently met with a large apartment company who told him they would be selling most of their holdings at a loss these days, so they will continue holding."
Even remodeling, which would seem one logical result from this, is off. "Customers taking out loans for large remodeling projects now face stricter lending criteria and may delay their projects until they save up cash or interest rates fall," the firm noted.
There's no way to tell if the Fed will manage its soft landing, but as the consultancy wrote, "Customers taking out loans for large remodeling projects now face stricter lending criteria and may delay their projects until they save up cash or interest rates fall."
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