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A spring housing housing thaw? [2023]

A spring housing housing thaw [2023]
by Brad Cartier, posted in Newsletter

Hannah Jones of reports this week that home sales “gained significant ground” last month, jumping 14.5% month-over-month. This was primarily caused by the beginning of the spring buying season and a small decrease in interest rates over the past few months. Further, this reversed a 12-month decline in existing home sales. That said, low supply continues to keep prices elevated.

Existing home sales up

Source: (March 2023)

“Home sellers are still in a favorable position to cash in on home equity as prices remain elevated compared to last year, but the dwindling buyer pool makes the task more challenging. Home sales remain well below last year’s level, signaling that significant affordability gains must be made before buyers are able to return to the market en masse.”

Orphe Divounguy of Zillow reports on these numbers, noting that the total housing inventory in February increased 15.3% to 980,000 units. Further, the median existing-home price across all housing types sat at $363,000, down slightly 0.2% year-over-year.

Based on the data, Aarthi Swaminathan of MarketWatch concludes, “[t]here’s clearly a ton of pent-up demand in the housing market, as seen by February’s jump in home sales. A dip in mortgage rates may have propelled home buyers to jump on purchasing a home, boosting sales. But meeting supply is the biggest issue at the moment.”

Further, Fan-Yu Kuo of the National Association of Home Builders (NAHB) reports that pending home sales rose 8.1% in January, but on a year-over-year basis, declined 24.1%. 

Pending home sales up

Source: NAHB (March 2023)

Looking at the data geographically, Kuo notes that “all four regions saw an increase in existing home sales in February, ranging from 4.0% in the Northeast to 19.4% in the West. However, on a year-over-year basis, all four regions continued to see a double-digit decline in sales, ranging from 18.7% in the Midwest to 28.3% in the West.”

Spring housing thaw?

Despite stubbornly high housing prices, reduced interest rates, and the beginning of the spring season, many believe we will see a spring housing thaw this year. In addition to home sales jumping 14.5% in February, Lily Katz reports on Redfin data showing that nationwide home prices dropped 1% as home sales and competition leveled off following a year of declines.

Diana Olick of CNBC reports that this is the first time in a decade that we’ve seen home prices drop, signaling a potential return of buyers to the market as we enter a busier spring buying season. 

“Higher mortgage rates have been cooling home prices since last summer, and for the first time in a record 131 consecutive months — nearly 11 years — prices were lower on a year-over-year comparison…That lower median price could be a sign that homes on the more affordable end of the market are selling.”

In their latest survey, the Mortgage Bankers Association (MBA) reported that mortgage applications increased by 3% weekly, with refinances jumping 5%. That said, we are still significantly lower than the volumes seen at the same time last year. Joel Kan, MBA’s Vice President and Deputy Chief Economist, notes: 

“Treasury yields declined last week, driven by uncertainty over the health of the banking sector and worries about the broader impact on the economy. Mortgage rates declined for the second week in a row, with the 30-year fixed rate dropping to 6.48 percent, the lowest level in a month…However, mortgage rates have not dropped as much as Treasury rates due to increased MBS market volatility. The spread between the 30-year fixed and 10-year Treasury remained wide at around 300 basis points, compared to a more typical spread of 180 basis points.”

Home flipping

A new report from ATTOM Data Solutions shows that home flipping is increasing nationwide, however, gross ROI still sits at record lows. Homes flipped by investors in 2022 accounted for 8.4% of total home sales, the largest figure since data began in 2005. This is up from 5.9% in 2021 and 5.8% in 2020. Further, 2022 home flips generated an average gross profit of $67,900 nationwide, down 3% from $70,000 in 2021. 

This number accounts for a 26.9% return on investment compared to the acquisition price. Finally, home flips completed in Q4 2022 took an average of 165 days, up from 153 days in Q4 2021.

Home flip profits down

Source: ATTOM Data Solutions (March 2023)

Rob Barber, ATTOM’s CEO comments on the data:

“Last Year, home flippers throughout the U.S. experienced another tough period as returns took yet another hit. For the second straight year, more investors were flipping but found no simple path to quick profits…Indeed, returns are now at the point where they could easily be wiped out by the carrying costs during the renovation and repair process, which usually accounts for 20 to 33 percent of the resale price. This year will reveal more about whether investors decide to find different ways to profit from home-flipping or take a step back and wait for conditions to get better.”

Bernice Ross of Inman (subscription required) reports on the difficulties facing home flippers, noting that “Declining prices, increasing interest rates, contractor shortages, and a totally unpredictable supply chain have made flipping houses a risky proposition where it’s next to impossible to make a profit.”

Finally, AJ LaTrace of Business Insider reports on larger home flippers: “Last week, two of the biggest remaining corporate home-flipping companies, Opendoor and Offerpad, reported dismal earnings, another sign that their business model is incredibly risky.” Opendoor reportedly lost almost $400 million after selling 7,500 homes during Q4 2022. Further, Offerpad announced a Q4 2023 net loss of $121 million, losing an average of $32,800 on each home it sold.

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