Demand destruction started to creep up after the Federal Reserve (Fed) aggressively raised interest rates. For the first time in almost ten years, this demand destruction is becoming evident in the real estate market as US home prices fall.
With the rate hikes, mortgage rates shot up as well, rising from the 2.88% seen a year ago to now 6.29%. Meanwhile, the S&P CoreLogic Case-Shiller House Price Index fell for the month of July by 0.4% month-on-month (MoM).
Similarly, the rise in home prices decelerated by the most in the index’s history, but peculiarly new home sales rose by 29% in August.
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Focusing on pricing
The increase in new home sales could be tied to prices lowering and home builders offering better conditions and rebates to entice buyers to dip their toes in the market. Lennar (NYSE: LEN), in its Q3 earnings release, highlighted that the firm is focusing on pricing as the demand versus supply in real estate has not yet been balanced, with demand far outstripping the supply.
“Sales have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing, and demand remains strong as we navigate the rebalance between price and interest rates.”
More pressure to come
There is a real possibility of more pressure being exerted on the real estate sector as the Fed announced further rate hikes in the near future.
The record 300 basis point hikes seen so far in 2022 are already pushing analysts toward a recessionary scenario, and with mortgages becoming more expensive, real estate investors and new home buyers could shy away from the markets.
Overall, home builder stocks have performed well in 2022 compared to the rest of the market, but with sales slowing, prices falling, and mortgages rising, that could soon change.
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