Following the home builder stocks drop on June 16, softening demand seems to be pushing the housing market into a downturn. Meanwhile, the Federal Reserve (Fed) is battling raging inflation by aggressively hiking rates, creating fears of a recession.
With such a backdrop, treasury yields are rising as well as borrowing costs for the end consumers thus creating a vicious circle for the housing market, which seemingly went soft overnight.
In the meantime, CEO of Redfin Corp (NASDAQ: RDFN) Glenn Kelman, speaking with CNBC’s “Squawk on the street”, weighed in on the state of the housing market and announced layoffs of 8% of the workforce in his company.
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“I feel this deep responsibility for the fact that we had too many people coming into this homebuying season. We have been hiring at a berserk rate in 2020 and 2021 just to keep pace with the housing market, and then everything went soft very quickly, and we found ourselves idle in many departments, so we’re at the right size now.”
May housing demand down
Equally important, the housing data for May came in lower than expected, dropping by 14.4%, and with a rise in interest rate, it doesn’t seem likely that the demand will spring back up as quickly. On the other hand, Kelman believes that the change has not been cataclysmic and that the demand could soon return.
“There is a huge change when you go from 20 offers on one house to 5 offers to 1 offer. All you need is 1. And what we’re seeing is that 1 in 4 homes are now being discounted, and that indicates that some properties aren’t getting a single offer whatsoever. So even though demand is down 15%, our offer win rate is significantly up, because almost every offer we write ends up winning.”
He also added:
“The median payment for a median home has increased 50%, because that’s the product of interest rates and home price increases, and both have shot through the roof. So it’s really just a question of how much dry powder the consumer has, especially after their 401k has been waxed.”
Price increases
The median home price has risen over 44% in just two years, moving above the $400,000 mark.
Comparably, home sales are plummeting reaching the 2020 lows, falling over 9% year-over-year (YoY).
Overall, it seems as if the housing market will depend on whether consumers can ride out the inflationary pressures, rising interest rates, and a worrying macroeconomic outlook to start rebuying homes again.
Based on these inputs, investors could expect more volatility in the housing market and with homebuilder stocks.
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