Rising interest rates cool red-hot new home sales

Southern Nevada homebuilders recorded their second-highest April for new-home sales over the last five years, but rising mortgage rates have slowed the momentum from the first quarter, especially with first-time homebuyers.

April’s 913 net sales — sales minus cancellations — fell about 30 percent from March and were down 25 percent from April 2021 when there were 1,215 sales, according to Las Vegas-based Home Builders Research.

That’s a steep drop that coincides with the average 30-year fixed-rate mortgage hovering around 5.28 percent this week. It was 2.96 percent on May 1, 2021, and just above 3 percent on Dec. 1 last year. It has steadily increased since then to 3.45 percent to start 2022; 3.76 percent on Feb. 1; 4.17 percent to begin March and 4.98 percent to start April.

While net sales were down in April, they were still higher than the 878 in April 2018; 842 in April 2019; and 244 in April 2020 when COVID-19 shut down the homebuilding industry.

“We can see that April 2022 was still higher than 2018 and 2019, and so instead of seeing the number from this year as bad, it again just shows how great 2021 was,” according to Home Builders Research President Andrew Smith. “It’s also normal for April to be lower than March, historically.”

That doesn’t mean there aren’t concerns going forward of where home sales are heading, he said. To lessen any concern, the 30-year fixed rate was as high as 4.87 percent in November 2018.

“The feeling is with mortgage rates, that they have gone up relative to the past two years; they are where things were in 2018 and 2019,” Smith said.

Some people in the mortgage industry see any pullback as “an initial sticker shock situation where it seems like a big deal right now.” It may not be as big a discussion by the end of 2022 even though rates (will go higher), Smith said.

“That doesn’t mean affordability is not an issue, but it’s not going to have a big effect on people who need to move or want to move,” he added.

Based on net sales numbers, those buying lower-priced homes appeared to have affected the most, while higher-priced home sales were impacted the least. Some of that is attributed to rising prices with the year-over-year gain between April 2021 and April 2022 at 19 percent for single-family homes. That’s been driven by higher labor and material costs and land prices.

Home Builders Research reported there were 164 sales below $400,000 this past April compared to 629 such sales in April 2021. For houses priced between $400,000 and $500,000, there were 344 sales in April 2022, the same as in that month in 2021. Going up the price range, there were 323 sales between $500,000 and $750,000 this past April compared to 189 a year ago. In the $750,000 and higher category, there were 82 sales this April compared to 53 in April 2021, Home Builders Research reported.

“The higher price ranges are showing more sales because that’s what is out there,” Smith said. “There’s literally nothing from a new-home perspective under $250,000 and very little under $300,000.”

Smith said May sales started off poorly for homebuilders but bounced back the following two weeks, which fits into the sticker-shock narrative. Sales went from 273 during the last week of April to 149 in the first week of May, about a 45 percent drop Smith said. In the subsequent weeks in May, sales were 205 and 212, he said.

Klif Andrews, division president of Tri Pointe Homes, said rising interest rates “have slowed activity somewhat,” but buyers at more premium price points aren’t changing their buying habits much.

“For the best lots in the best communities, it really hasn’t slowed down,” Andrews said. “The basic entry-level house is probably most affected by rising mortgage rates because less buyers are able to qualify. That part of the market is more of a struggle, compared to move-up and premium parts of the market, which is primarily what we do. Buyers at premium price points that have a lot of equity in their existing home, cash and a lot of motivation to upgrade their real estate don’t seem to be affected too much.”

Andrews said there continues to be strong demand for new homes and such little supply that it hasn’t affected what they’re doing. He predicts once mortgage rates top out “in the near future,” the market will settle down because buyers remain in a good frame of mind.

“This hasn’t changed our operations much,” Andrews said. “I don’t have any need to scale back. We have sold so strongly for the last year-and-a-half that we’re almost playing catch-up anyway. We are as an industry too, and it’s not putting much pressure on us. Things aren’t that far out of whack. Last year was such a crazy good year that this year will not be as strong as last year. We can’t build that much anyway. Labor and materials are difficult to come by.”

Before the slowdown in April, Southern Nevada Home Builders Association CEO Nat Hodgson said builders were on a pace that he “was getting nervous about.” If the trend continued, builders would pull permits to build 17,400 homes when the industry is capable of building closer to 14,000, he said. Demand isn’t lessening, so the industry is in a good spot going forward because of relocations to Nevada and limited existing home supply, he said.

“With interest rates and inflation, people are saying, ‘let’s wait for a couple weeks or months to see what happens with the stock market and what is happening with inflation, Ukraine, Russia and the rest of the world,’ ” Hodgson said.

“People are still moving here, and our population is still growing. We still have to build and sell homes. It’s not a reset. Nobody is panicking and talking about dropping prices or offering incentives just because of a few weeks of lighter sales. We need to catch up with supply chains, anyway. When interest rates stop (increasing), more people will jump back in.”

Luke O’Loughlin, director of sales for Richmond American Homes, said his company continues to be busy with several communities coming online. It will monitor what’s happening on a regular basis, but pointed out Richmond American Homes had a long run of consistent sales.

“This is the first time there’s been inconsistency since COVID hit and we were shut down for about 45 days,” O’Loughlin said. “What is interesting about this run is that it’s new to all of us, and buyers with interest rates are doing what they’re doing. Historically, interest rates are still very appealing and very good. It’s new, and it will take a minute for people to adapt.”

O’Loughlin said the quality of the buyers shopping for homes remains strong because they know the rates and pricing and what their monthly mortgage will be. In years past, everyone was looking because they thought they could get a house.

“Now, it’s your true buyers that are out there,” O’Loughlin said. “It’s tough to be a first-time buyer out there, right now. The rates haven’t affected us on some of the higher-end homes, and I think anyone who has a home to sell right now, and is able to take out equity are the ones with the upper hand in this market and ability to go out there and buy.”

Mosi Gatling, sales manager for mortgage company loanDepot, said there are people who don’t qualify for loans today, who began their search a year ago. Since then, interest rates jumped two percentage points higher and prices are up more than 20 percentin some cases.

“There’s also a lot of people holding off and not pulling the trigger and reevaluating in the hope that rates go down,” Gatling said. “For people who have been looking for so long, it’s a big change that people have to digest along with everything else in life costing a little bit more right now.”

Gatling said on a $400,000 home, buyers are paying $450 a month higher with the two-point jump in mortgage rates.

“Even if you can afford it, that’s a lot to think about,” Gatling said. “And if that same house costs more on top of that, you may sit back and consider that if the payment is $700 or $800 more because of the price and rate for the same house you’ve been eyeing for a year, do you pull the trigger, especially if you’re income isn’t keeping up when you have gas and other necessities that are higher. Did you get a raise of $400 to $800 in 12 months to keep up with what housing did?”

Those people, however, still have a need for housing and as their leases expire and rents continue to increase, it’s still an attractive option to buy in the future, Gatling said.

“Some people aren’t buying, not because they don’t qualify, but they need to retool what their goals are because of the cost,” Gatling said.

Buyers must put down at least 3.5 percent on a Federal Housing Administration loan and 3 percent for a conventional loan for first-time buyers, Gatling said. On average, most people put down 5 percent, she said.

“We are seeing people put down more of a down payment to flex the bang for their buck, and (what their) monthly payment might end up being instead of going with the minimum,” Gatling said. “With the higher-priced homes, maybe they were thinking about putting down 10 percent and borrowing the rest because it made sense, because the cost of money was low. Because it’s not, they have the ability to go into the bank account and take out 20 percent down to eliminate that mortgage insurance or get more favorable terms.”

Gatling said the latest expectation is mortgage rates could approach 6 percent in 2022. That depends on actions of the Federal Reserve, which is trying to reduce demand and slow inflation.

“We were OK coming into January, but we had a 1½ percent spike in such a short term (over three months),” Gatling said. “That was the scary part. They are forcing the rates up by design to slow down the runaway buying of goods and correct the market and get people to sit down for a while. If we’re lucky, it does correct somewhat, but I don’t see us going back to the high 2s or low 3s, because we were not there pre-COVID.”

Lennar was the top builder in sales in Southern Nevada in April with 209 net sales, and the only leading builder to surpass April 2021 sales. It was followed by Pulte Group with 144; KB Home with 118; DR Horton with 69; Richmond American Homes with 57; Toll Brothers with 55; Century Communities with 41; and Tri Pointe Homes with 40. Touchstone Living had 39, and Beazer Homes had 35 to complete the top 10.

In April 2021, Lennar was No. 1 with 206 sales followed by KB Home with 198; Pulte Group, 158; DR Horton, 105; Richmond American Homes, 85; Tri Pointe Homes, 77; Century Communities, 66; Touchstone Living, 59; Beazer Homes, 54; and Taylor Morrison, 53 to compete the top 10.