Interesting times in the housing market
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We may be witnessing a critical shift in the housing market. Since COVID, the housing market has been defined by a lack of supply. This has led to bidding wars for listings and steadily rising prices – both more beneficial for sellers than buyers. However, the worm may be turning, and the future might be different.
Housing Market Sentiment
We have seen a softening in sentiment around the housing market. The most widely used measure of housing sentiment comes from the National Association of Home Builders (NAHB), which conducts a monthly homebuilder sentiment survey. That sentiment has weakened notably over the last year, with more builders viewing conditions as poor than good. That negative sentiment holds for all four regions of the country.
Why the Drop in Sentiment?
The natural question is “why?” There are a few reasons. As home prices have increased, that makes homes less affordable. While this is good news for sellers, it is obviously rough on buyers. Adding to the strain on buyers, mortgage rates have increased considerably. After a decade-plus of below-average 30-year mortgage rates, including a post-COVID stretch of sub-3 % rates, they jumped in 2022 and remain close to 7%.
Post-purchase costs are also on the rise. Rising home values mean rising property taxes. Insurance rates are up nationwide and dramatically in certain areas such as Florida and California. Homeowners associations (HOAs) are more common, and their fees have risen faster than home values and inflation.
For condominium owners, special assessments are another headache. This is especially true in Florida, where the condominium industry is still dealing with the fallout from the 2021 Surfside collapse. (And though that is only one state, it is a huge condominium market. According to the Census Bureau and Wall Street Journal, one out of every five condominiums in the United States is in Florida.)
Policy uncertainty is also weighing on the market. While tariff changes are not final, builders are already seeing price increases from suppliers. They are currently estimating that these increases will add nearly $11,000 to the cost of an average home.
As a result of the above pressures, the number of home sales has fallen, and the supply of available houses has risen. Buyers seem less willing and/or able to meet sellers’ demands. In the existing home market, sellers are largely unwilling to compromise on price. For new homes, homebuilders have turned to incentives such as buydowns (a technique to lower the realized mortgage interest rate) and are willing to come down on price to move unsold homes.
Recent Results
Sure, you may think the sentiment is not great, but have we seen any impact in the data? Why yes, yes, we have! Homebuilder DR Horton recently released its quarterly results. For the first quarter of 2025, orders fell 15% versus the prior year. Their average price per home sold was flat, which aligns with the broader theme of sellers not yet competing on price. Competitor PulteGroup saw a 7% drop in new orders in the quarter.
Summary
Home sellers have enjoyed the upper hand in recent years, but buyers may soon enjoy a little more leverage. What remains to be seen is how much leverage they will enjoy – enough so that we see a drop in home prices for 2025?
That is exactly what Zillow is forecasting: a 1.7% drop in home prices for the year. As with most economic issues, there are many moving parts that will determine the ultimate outcome—what will final tariffs look like? What happens with interest rates? Does the economy go into a recession (as more and more forecasts imply)? Time will tell…
David Crossman, is a Senior Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email David at dcrossman@bedelfinancial.com.