'Probably past the worst': Housing shows signs of stabilizing to round out 2022

The housing market has borne the brunt of the Federal Reserve's aggressive interest rates.

But mortgage rates are now on a downswing, with the average 30-year fixed mortgage slipping to 6.09% as of last week, according to Freddie Mac. That's down from a peak of over 7% in November.

"Interested buyers are out there," Odeta Kushi, First American Deputy Chief Economist, wrote in a statement. "From a financial perspective, the decision to buy a home comes down to a payment-to-paycheck calculation, and lower rates may help to reduce the mortgage payment while higher incomes can increase one’s monthly paycheck."

As Redfin (RDFN) CEO Glenn Kelman said late last month, the housing market in January was "stronger than anyone could've hoped."

Still, signs of demand are still tepid. Mortgage applications to purchase a home fell 10% for the week ending January 27, which marked a 41% drop from a year ago during the same period, per the Mortgage Bankers Association. And just 16% of prospective buyers said now is a good time to buy, the same as in November, according to a survey by the University of Michigan.

Over the last couple of weeks, however, new data has offered some signs the housing market may have begun to turn a corner as the calendar flipped from 2022 to 2023.

Home Builder Sentiment

The biggest obstacle for homebuilding in 2022 was a pessimistic outlook carrying into the new year, but there are signs that viewpoint has changed.

Confidence among single-family home builders in January rose for the first time in over a year, ending a 12-month stretch of declines and signaling a potential turning point in the housing market.

"Probably past the worst, but a sustained improvement will have to wait," Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, wrote in a note following the release on Jan. 18.

The latest survey showed builders continue to use incentives like price reductions to boost sales, but NAHB Chairman Jerry Konter predicted that the lows for housing permits and starts are likely near and "a rebound for home building could be underway later in 2023.”

Housing Starts

American builders continued to slow down home construction in December, as housing starts fell 1.4% in the last month of the year to an annualized rate of 1.38 million homes, down 22% from December 2021 levels, the Commerce Department said Jan. 19.

Housing starts for single family homes rose 11.3% to an annualized rate of 909,000, while multi-family housing starts came in at a rate of 463,000.

Permits to build slipped 1.6% in December to an annualized rate of 1.33 million, down nearly 30% from the same month in 2021. And permits to build single-family units dropped 6.5% to an annualized rate of 730,000, while multi-family permits reached a pace of 555,000 in December.

Higher construction and labor costs also plagued new builds.

Construction costs rose more than 30% since the beginning of last year due to persistent supply chain disruptions, according to the National Association of Home Builders.

Existing Home Sales

Existing home sales in December fell to an annualized rate of 4.02 million, an eleventh consecutive monthly decline, but still better than the rate of 3.95 million expected by economists, according to Bloomberg data.

The median sales price for an existing home jumped 2.3% to $366,900 compared to a year ago, according to data from the National Association of Realtors released Jan. 20.

"December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates," NAR Chief Economist Lawrence Yun said in a statement. "However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year."

Total inventory for housing reached 970,000 units at the end of December, down 13.4% from the prior month. That's still 10.2% higher than a year ago.

Blaine, Minnesota, Sign advertising new one level homes for sale starting at 450,000 dollars. (Photo by: Michael Siluk/UCG/Universal Images Group via Getty Images)
Blaine, Minnesota, Sign advertising new one level homes for sale starting at 450,000 dollars. (Photo by: Michael Siluk/UCG/Universal Images Group via Getty Images)

Pending Home Sales

The National Association of Realtors index of contract signings to purchase previously owned homes rose 2.5% from the prior month in December to 76.9, ending a six-month slide, according to a release on Jan. 27.

Signed contracts of previously owned homes fell in the Northeast and Midwest, however the story changed in the South and West, which posted monthly gains. All four regions experienced a dip in transactions for the year, with the West taking the biggest hit of 37.5%.

"This recent low point in home sales activity is likely over," Yun said. "Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market."

New Home Sales

New homes sales rose 2.3% last month to an annualized pace of 616,000, up from November’s 602,000, according to a report from the Census Bureau released Jan. 26. This figure is still 26.6% below December’s pace of 839,00 in 2021.

The median sales price of a new home in December stood at $442,100, while the average sales price reached $528,400. At the end of last month, there were 461,000 new homes on the market for sale, representing 9 months of supply at the current sales rate.

Meanwhile, in recent earnings reports, homebuilders suggested they're responding as buyers slowly head back into the market amid lower mortgage rates and better pricing.

Atlanta-based PulteGroup (PHM) said on its earnings call last week it is planning, "a consistent cadence of new starts" as it tries to turn inventory at a consistent pace as the housing market picks up.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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