Housing Bubble Getting Ready to Pop: The Big Boys Leave, Waiting for Reset

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Biggest investors in single-family houses: “We need to be patient and allow the market to reset.”

 

We’re now getting all kinds of commentary from housing industry insiders and big institutional investors in single-family houses. They’re talking about this during their earnings calls.

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American Homes 4 Rent is one of them. The company was founded during the Housing Bust and bought up tens of thousands of single-family houses that it then rented out. In addition to buying houses, in recent years it has started building its own subdivisions with just rental houses, that are specifically built for rentals. The company received enormous amounts of funding over the years from investors, including when it went public via an IPO in 2013.

So American Homes 4 Rent, during its earnings call last week, said a bunch of things that we have already seen in the data. And the data coming from all directions has for months been pointing at a housing downturn.

There is now a huge supply of new houses for sale, in all stages of construction, over 9 months’ supply in total, according to the Census Bureau. In terms of the number of houses, by June, there were 463,000 new single-family houses at all stages of construction for sale, the highest since May 2008, and up by over 30%, from a year ago.

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Homebuilders’ cancellation rates spiked to nearly 18% of their total signed contracts in July, more than double from earlier this year and last year, according to data from real estate consulting firm, John Burns. And this cancellation rate was even worse than the cancellation rate in April 2020, during the lockdowns.

The Census Bureau reported that sales of new single-family houses have plunged 17% from a year ago, and are just barely above the lockdown low of April 2020.

The National Association of Homebuilders reported that its index for foot traffic of prospective buyers of new houses plunged in June and is now down to levels not seen since 2014, except during the lockdowns in March and April.

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Traffic is an indication of interest by buyers, and buyers have lost interest – at least at these prices.

Homebuilders reacted by cutting prices: 13% of the builders reduced home prices in June to boost sales “and/or limit cancellations,” according to the National Association of Homebuilders.

And based on Census data, prices of new houses have plunged 12% in the two months of May and June, as homebuilders are trying to sell their inventory that is piling up.

Similar thing with previously-owned houses, condos, and townhouses that a homeowner or investor is trying to sell. Realtors have been complaining for months about the plunging foot traffic and showings.

Sales of single-family houses nationwide dropped by nearly 13% year-over-year in June; and sales of condos and co-ops plunged by 25%, according to the National Association of Realtors. This was the 11th month in a row of year-over-year sales declines.

Just an example of what to expect: Pending sales in California – an indication of what future closed sales might look like – collapsed by 40%, according to the California Association of Realtors.

The sales declines have been accelerating, amid the surge in mortgage rates to around 5.5%, even as inventory is suddenly coming out of the woodwork.

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