The housing market correction has just taken a new turn

“Depending on market dynamics and backlog levels in each community, we will become more aggressive with our pricing ahead of the spring sales season to generate new business,” KB Home told investors back in January after it released its disappointing fourth-quarter earnings.

Fast-forward to February, and it looks like we’re already witnessing the housing market correction – which saw new and existing home sales contracts take off at record speed in the second half of last year – entering a new phase. What’s up? Aggressive homebuilder price cuts coupled with incentives such as mortgage interest buybacks are helping homebuilders push sales back up.

This surge in new home sales could mean that the home price correction on the new construction side is losing momentum. Or at least lose steam for now.

“For the most part, builders have currently based their drugs on pricing. And we think home prices nationwide — on the new-home side, without incentives — are about 10% below peak levels,” Rick Palacios Jr., director of research at John Burns Real Estate Consulting, said in a video posted on Saturday. “There’s probably not much runway left.”

Let’s be clear: Palacios is talking about the house price correction on the new house side. On the inventory or “resale” side, he thinks the home price correction still has a way to go.

“We still think there is more [home] On the resale side, however, a price correction is imminent. And the resale market is always down when it comes to this [home] prices,” says Palacios.

Unlike homebuilders, who have to cut prices to move unsold inventory, existing homeowners tend to be more resilient to such cuts. This resistance is why existing home prices are usually the last to bottom in a downturn in the housing market.

Let’s take a closer look at the ongoing fix on the existing page. Here are the dates.

For 124 consecutive months, from the nadir of the previous housing crisis in February 2012 to the peak of the pandemic housing boom in June 2022, the price of existing single-family homes in the US, as measured by the seasonally adjusted Case-Shiller National Home Price Index, posted positive month-on-month growth home prices.

This phase is now over.

As of the last reading in November 2022, prices for existing single-family homes are down 2.5% from the all-time high of June 2022. On the one hand, this decline marks the second largest home price correction since World War II. On the other hand, it’s a slight correction compared to the 26% fall in home prices between 2007 and 2012.

It will be another six weeks before the Case-Shiller reading for January is released. However, preliminary data shows that the house price correction on the existing home side could also lose some momentum in 2023.

An analysis of Zillow Home Value Index data from wealth (see chart above) finds that 79% of the country’s 200 largest housing markets saw monthly home price declines in September. That number has since fallen, slowly but surely.

In October, 76% of these major markets saw home prices fall. In November and December it had fallen to 64% and 67% respectively. In January, however, only 47% of the country’s 200 largest housing markets saw monthly home price declines.

Indeed, last year’s mortgage rate shock, which saw the average 30-year fixed-rate mortgage rate jump from 3% to over 6%, triggered a home price correction. However, the correction continues to be forked: some markets are seeing a sharp correction while other markets have not seen much of anything.

“If you’re anywhere in Texas or west of Texas, you’re probably more down … if you’re anywhere east of Texas, you’re probably not down that much, if at all,” says Palacios.

This bifurcated housing correction is why KB Home, which has a high business concentration in the fast-correcting West Coast and West Mountains markets, saw a cancellation rate that exceeded its peers, which do more business in the Midwest and Northeast.

When it comes to home price correction, one big joker remains: mortgage rates.

“Previous price cuts now combined with significant interest rate declines are helping on the side of price stability for new homes (in some markets). [mortgage] Rates remain around 7% or break above, lower [new and existing] Price cuts may be needed,” Palacios said wealth.

Want to stay up to date on the real estate market correction? Follow me on Twitter at @NewsLambert.

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