'Homebuilder Sentiment Is Very Low at the Moment': A Discussion of Housing Trends in the Southeast

Tom Heintjes: Hello, and welcome to a new episode of theEconomy Matters podcast. I'm Tom Heintjes, managing editor of the Atlanta Fed'sEconomy Matters magazine, and your podcast host. Today, we're once again sitting down with one of our regular guests, Domonic Purviance, a subject matter expert in the Atlanta Fed's Supervision and Regulation Division-and the person who maintains the Atlanta Fed's Home Ownership Affordability Monitor (HOAM). Domonic, thanks for being on the podcast again today.

Domonic Purviance: I appreciate being here today.

The Atlanta Fed's Domonic Purviance during the recording of the podcast episode. Photo by David Fine

Heintjes: Domonic, I was going over some notes ahead of sitting down with you today, and I saw that it's been almost a year since we had you in that seat. That's an eternity in terms of the housing market, so we have a lot of ground to cover today, so let me dive right into my first question. First off, I want to ask you: What are the overall trends you see in housing, both regionally and nationally?

Purviance: I appreciate being here again-you'll have to have me back more often.

Heintjes: I agree.

Purviance: I think if I had to characterize the big difference from a year ago to where we are now, it's the housing market is definitely showing signs of trending more towards a buyer's market than a seller's market. And some of the factors impacting that are, number one, inventory is higher. We've had several conversations about how there's a shortage of supply that's creating itself, with pressure on home prices. And I do think nationally, supply is still-relatively speaking-low, though it's not as low as it was over the past few years. The other thing that's happening is, price growth is actually slowing as a result of having more inventory. That creates less upward pressure on prices, so price growth is slowing. Probably the biggest wild card that's impacting the housing market today-besides the higher inventory and lower prices, I think-is a greater buyer hesitancy. It's driven by a lot of uncertainty in the market, not just in the housing market, but in the economy in general. And if I had to think about the region-we'll spend a lot of time talking about the Southeast today-there is a lot of variation around the characteristics of the housing market, depending on where you are. Certainly, the Southeast has been more negatively impacted by the slowdown in housing demand, and a little bit of the greater hesitancy in buyers. If you look at some of our markets in the Southeast, you see inventory is a lot higher, sales have been a lot slower, home prices have moderated-in some cases, we've seen home prices contract in some markets. And all of that, to me, is an indication of a greater shift towards the buyers versus sellers.

Heintjes: And even within the Southeast, you see a lot of variation-but we'll touch on that shortly, so let's hold that thought. Hovering over all of these discussions are mortgage rates, and I want to talk a bit about mortgage rates. They've moderated a bit, but they're still above the very low rates we saw, say, during the pandemic. How would you describe the impact of where mortgage rates are now on the residential real estate market today?

Purviance: Well, mortgage rates today, I think last week we were around 6.56 percent. Generally, we've ranged between 6.5 percent and 7 percent on a 30-year fixed mortgage rate. And so we're at the lower end of that range now, which is positive for home ownership affordability. And just to put it in perspective: in January of this year, we were over 7 percent. So down to around-let's just say 6.6 percent-is a pretty significant decline. It has made housing more affordable. Now, it hasn't significantly impacted affordability. Overall, housing still remains very unaffordable. We'll talk about it a little bit later. But that decline in mortgage rates has helped people who are a little bit on the fence-the "fence" around being able to afford or qualify for a mortgage-it's making it a little bit more positive for them. We've still got a little ways to go before rates get to a point where we can see housing affordability drop down to normal levels. So one of the things I like to tell people in some of my presentations: a 6.6 percent mortgage rate is pretty good, if you look at the long-term average, based on rates going back to the 1970s. About 6.7 percent is about the long-term average, so we're just below the long-term average. But the problem is, home prices relative to incomes are much higher than they were, historically. It's one of the reasons why today, with our measure of housing affordability that we produce at the Atlanta Fed, it still would take somewhere around 48 percent of the median income to afford the median-priced house-even given the fact that interest rates have been moderating. And that's because prices are much higher relative to income, so we've still got a little ways to go before it really has a strong enough impact on housing demand.

Heintjes: You mentioned housing affordability, and I want to drill down into that a bit. Affordability is always a concern, and it's something we've talked about a good bit on this podcast, in fact. What are the trends you see in housing affordability, and does that affordability differ in the Southeast compared to the rest of the country?

Purviance: I have to mention our latest numbers. June-we're actually in the process of updating our Home Ownership Affordability Monitor for July, so we'll have a newer number. And I expect affordability to improve, because interest rates have improved. We're always a few months behind because of how we get home price data. We need a few months to get a full idea of where home prices are. But in June, as I mentioned, the median income household would have needed to spend 48 percent of their annual income to afford the median-priced house. Now, as much as we've talked about affordability, affordability has never been that low. That's an historic low in housing affordability, meaning that spending 48 percent is sort of a historic high, is the way to think about it. So, that was mainly driven by the fact that throughout most of this year-the last few months notwithstanding-interest rates have remained relatively high and home prices continued to go up-at a more moderate level, but they're still increasing. And income growth hasn't really kept pace. It's a little bit higher than inflation, but it hasn't been able to keep pace with where home prices and interest rates are. So altogether, home ownership affordability remains relatively low compared to historic standards, and it is one of the driving factors of why we're not seeing as robust demand for housing, even given the fact that interest rates have moderated and inventories have increased. Now, in the Southeast, we've seen affordability improve at a sharper rate in a lot of our markets, mostly because we're seeing some correction in home prices. Nationally, home prices have sort of moderated. They're still positive, they're not necessarily in negative territory. But we have some markets-like if you look at our largest markets in our district, Atlanta or Nashville-in those markets, affordability remains relatively low. Home prices have started to not necessarily correct but have declined a little. The rate of increase has moderated, so those markets are still relatively unaffordable. But if you look at some markets like southeast Florida, southwest Florida-we'll probably spend some time coming back to some of those markets, like Coral Gables and Fort Myers-those markets have actually seen home prices decline. When home prices decline, that makes housing more affordable, so that means our affordability index has shown an improvement. So it's improving, but it's mostly because prices are declining in those markets.

Heintjes: So, in that sense, Florida differs a bit from the rest of the Southeast. It's actually seeing a correction.

Purviance: Yes. I would characterize what we're seeing in prices, particularly in southwest Florida, as a price correction. A price correction is just when you see prices declining at a significant rate. There's a difference between a price correction and a price crash. Normally, prices "crash" when you see high, double-digit price declines in some markets. Overall, in some of the south Florida markets, I would characterize what we're seeing as a price correction-meaning that prices are declining by mid-to-high single digits. Now if you look at product types-if you look at condos in those markets, and throughout the state of Florida-condos have seen a significant correction in price. We've seen, in some markets, condominiums declining by as much as 20 percent year over year. That's a significant correction, in my view. It's something that we've been paying very close attention to.

Heintjes: Before we move on, I want to put in a plug for your Home Ownership Affordability Monitor, which you said is about to be updated. It's a great tool, and I encourage anyone listening to go check it out. We'll have a link on our website. But Domonic, sales of new single-family homes fell a bit in July. It seems like that's something that would improve affordability, but I also know that things don't always work out like that. How would you characterize the rate of home sales compared to affordability levels?

Purviance: When you're talking about the new home market, there are several factors that are negatively impacting conditions in the new home market. First, a new home, obviously, is going to be more expensive on a price-per-square-foot basis than an existing home-so you already have that competitive challenge, if you're not priced competitively with an existing home. And so, what's happened is as existing home inventory has increased, it's creating greater competitive pressure with new homes. And on the other side, in order to maintain the sales pace throughout the year, the builders have had to increase the level of incentives in order to get buyers to buy. There are anywhere from rate buydowns, price cuts, incentives for agents, offering finished basements. There's a whole lot of incentives that are being offered in order to get people to buy. And so if you look relatively speaking, even though an existing home is going to be cheaper on a price-per-square-foot basis, there are so many incentives to buy a new home today that it's actually more cost effective to buy a new home than an existing home, mostly because of how much incentives are being offered.

Heintjes: Interesting. I was going to ask you about incentives, so let's go ahead and touch on that a little further. So homebuilders are still offering discounts or other incentives-it seems like that's the kind of thing that once you start offering them, then it would be hard to stop.

Purviance: Yes, I hear that a lot from our builder contacts.

Heintjes: "What have we done?"

Purviance: Yes. They expected this year to be a much stronger year in terms of housing demand. And so when interest rates increased over the past few years, builders immediately responded by doing rate buydowns. They expected that as demand returned, they would they would be able to pull back on some of those incentives. That hasn't materialized this year at all, and what's happened in the spring selling season of this year. We had a lot of external economic factors that created a lot of uncertainty. And so demand for new homes dropped significantly in the peak selling season of this year. That weakness in demand meant that builders had to offer more incentives than they were previously offering in order to get some buyers that are hesitant to get off the fence. And the hope is that when market conditions normalize, builders could pull back on incentives. But incentives today are as high as they've ever been, in order to get people to buy-and that is an indication of some significant weakness in the market for new homes.

Heintjes: Yes. And speaking of indicators, I know the month's supply of homes is an important metric-a closely watched metric-in this sector. How has the month's supply of homes shifted since the last time we talked? I know that some would-be sellers have pulled their homes off the market instead of lowering the asking price, and that must reduce the supply, obviously.

Purviance: Yes. This is really interesting. Typically, a balanced month's supply of inventory is somewhere between four to six months, and a month's supply tells you how many months it would take to absorb the current amount of inventory given the current rate of absorption. So we're selling a certain number of homes a month-if we continue to sell at that current rate, how long would it take for us to get through all of our existing home inventory? Now, through this cycle, when we say that we had a shortage of supply, it's because the month's supply has been pretty consistently below four months. And so, whenever you have the month's supply below four months, that creates this upward pressure on price, and that's what we've seen. And it's jumped a little bit above four months, it has come below four months, but nationally, month's supply has been right around that four-month supply range-so just at that shortage range. I would characterize today the housing market nationally as being in supply shortage territory. Still, not as bad as we've seen in previous years, but we're still in a short supply-or at the lower end of balanced. And it's different depending on what market you're in. A market like Cape Coral, Florida, has a month's supply of above six, so that is an oversupplied market, and that's why prices are starting to correct there. But as you mentioned, one of the big things that's been occurring is a lot of people put their houses on the market, they don't get the price they want, so they pull it off-it's called a delisting. And delistings are up by almost 50 percent compared to last year. And you have to keep that in mind when you're trying to understand the health of the market, because even though we're showing the month's supply is somewhere around balanced nationally, and we're not seeing any markets that have a significant oversupply, even at six months. That's oversupply, but that's not price crash territory. That's a correction, and that's what we're seeing. But that's mainly because people have put their houses on the market, they're not getting the price that they want, and they'll pull it off, so you don't have the opportunity for inventory to build. People who keep their houses on the market and who take a price cut in order to sell are people that have to sell. And people that are pretty comfortable, or they don't really have to sell-they're willing to wait until they get their price. But it gives you this false read around where inventory is. I think that if there weren't an increase in delistings, we probably would see much more inventory in the market, and a much sharper correction in home prices. But the delistings are something-it is an indication of where we are in terms of health, because if people can't get the price that they want and they have to remove it off the market, that just tells you, as I started by saying: This is more of a buyer's market than a seller's market.

Heintjes: I was looking at a survey you shared with me recently, a survey of real estate agents, and it described buyer urgency as decreasing, and sellers having felt greater urgency. Yet, we just mentioned that some sellers have pulled their houses off the market, so I'm not sure how to square everything I read-or maybe it can't be squared in such a huge economic sector.

Purviance: I think how you bring those two things together is: buyers, there's not a whole lot of urgency because, like we've been saying, there's a lack of affordability. Home prices are high, interest rates are still elevated, there's some economic uncertainty, so buyers are a little bit hesitant. Sellers want to sell, but they're not willing to sell at a discounted price if they don't have to. And so, the way to bring those two together-yes, there is greater urgency for people to sell. People have to sell because they get married, or they get divorced, or they-

Heintjes: Job change.

Purviance: Job change, their kids go to college, they want to downsize, so they want to sell. There's a natural churn of inventory where people are selling because they have to because of some change-of-life reason. But there's an unwillingness today to accept the price that it would take in order for those units to sell, so people are electing to take their homes off the market and sit for a little while-with the expectation that maybe in a few months or a year or so, maybe they can get their price. When people delist like this, it makes it difficult for prices to correct and find where they're naturally supposed to be. So it's going to take us a little bit of time for us to get to price discovery, simply because sellers are not willing to accept what the current market price is.

Heintjes: One factor behind the growth in the southeastern housing market has always been in-migration, or people from other parts of the US moving here. Are we still seeing that in the same numbers as before? Is that still a major factor?

Purviance: The short answer is no, in the interim. The change in domestic migration has been probably the biggest factor impacting housing demand, specifically for the Southeast. We're a market where, historically speaking, we've been much more affordable. People have been able to sell their houses in more expensive, high-cost markets and come and move to the Southeast. This is a market where a lot of people want to retire, especially in Florida, but there are several factors that are really impacting the rate at which people are willing to sell and move to the Southeast. One, of course, is what we've talked about a lot on this podcast, and that's the rate lock effect: people who are locked into a low-rate mortgage, they have a mortgage below 3 percent, the current mortgage is at 6.6 percent-there's a disincentive for them to sell their house and to get another mortgage. And as we talked about, 90 percent of all mortgage holders have an interest rate below 7 percent-and the majority of those have an interest rate below 4 percent, so they're not willing to go anywhere. The other thing that's really changed is a balanced level of unaffordability, nationally. What I mean by that is, people would move from a market like New York or New Jersey or Washington DC, and they would move to Atlanta or Florida because it's just more affordable-at least, the delta between the home prices in the Northeast and the Southeast was relatively high. Today, that delta has shrank, meaning that it's unaffordable everywhere, and so people aren't driven to move simply because housing is more affordable in another market. Chicago and Dallas are really great examples. Historically-let's say, 15 or 20 years ago-people moved from Chicago to Dallas because Dallas was much more affordable, at least on a price-per-square-foot basis. You can get a bigger house in Dallas than what you can get in Chicago. Well, today it's actually cheaper to live in Chicago than it is to live in Dallas, just because of the change in home prices. And the same would be the case in...I think a market like Atlanta is still more affordable than, say, Washington DC, but it's not that much more affordable. Incomes are much higher in DC than in a market like Atlanta, and so it sort of balances out affordability. Home prices are more expensive there than here, but because you make more money there-it sort of balances out. So if you make the median income in Washington DC, you're spending about 43 percent of your annual income on a house. If you make the median income in Atlanta, which is about $90,000 a year, you're still spending about 43 percent of your income on housing-so it's about the same. People today are more likely to move because they can make a higher income than because homes are somehow cheaper. So, we've sort of neutralized the impact of affordability because housing is just unaffordable everywhere you're going to go. And so now people are making different decisions: "Well, I want to move because I'm getting a higher-paying job in Atlanta than I can get in New York," or wherever. And because of that, you're seeing this big decline in migration. If you combine the fact that affordability is sort of neutralized, it's still an issue but because it's unaffordable everywhere people are making decisions because of other things. And the rate lock effect-you've seen this big decline in the amount of people moving. If you look at Florida, for example, in 2022 they had about 315,000 new people move to the market. Net domestic migration into Florida was about 315,000 then. Last year it was about 64,000. So you have like a couple hundred thousand fewer people move to the market-that alone will result in higher inventory levels and downward pressure on price.

Heintjes: Well, Florida is a state that has always especially benefited from in-migration. But as you noted before, we've seen some declines in home prices-in some cases, sharp declines. What factors are at work in Florida's residential real estate market that maybe aren't being felt quite as acutely elsewhere in the Southeast?

Purviance: I will say, all the markets in the Southeast have seen a decline in domestic migration. Georgia has seen a similar decline in domestic migration as Florida has. It's that Florida is so dependent on people moving to retire or to have a second home or whatever it is, that a significant decline in domestic migration into Florida is going to have a more adverse effect on the housing market than any other place. And so like I said, Florida-even though Georgia's seen a decline, some other markets in the Southeast have seen a decline-the decline in Florida has been pretty significant. And the other factors are-some of it is, on the domestic side, it's a rate lock effect. Primarily, I would say it's a rate lock effect. There are some markets that are heavily dependent on international buyers, like from Canada, that would come and buy in the South-particularly on the west coast of Florida, you get a lot of Canadians. In the southeast of Florida, like in Miami, you have a lot of foreign buyers from Central and South America. At least for the Canadian buyers, a lot of the geopolitical issues around trade policy have had some negative impact on the amount of Canadians either visiting Florida or wanting to buy a home in Florida. So those are factors that are unique. And also, the factors that are more acute in Florida, like higher HOA costs or higher insurance costs-those are known factors that have been impacting migration for the past couple of years, but that makes it less attractive to buy there as well. So that's what makes Florida a little bit unique in terms of migration than other places in the Southeast.

Heintjes: Domonic, how are the costs of inputs in home building affecting the market-not only the physical supplies-the lumber, the concrete, pipes, wiring, roofing, and so on-but the labor costs: the guys who build the houses?

Purviance: What's interesting is, pricing-on the material and the labor side-has been softer. And the reason is, given some of the potential impacts of trade policy on the material costs, there was high expectation over the past several months that we would see higher input costs. But that hasn't materialized, mostly because we've seen softening of demand. And so, we've been able to mitigate the higher material costs because demand has dropped to the point that builders have-particularly if you're a larger builder, you have the ability to negotiate on price. And so, we have not seen really strong negative impact from changes in trade policy on the input costs. Now on the labor costs, it's the same thing. Because we're seeing softening of demand, there is the ability for builders to negotiate on labor costs as well. We're in the early stages of that. We're not seeing drops in labor costs, but we have seen builders having a little bit more negotiation room, simply because we just don't have as high demand as we would expect given the peak selling season of this year.

Heintjes: Last time we spoke, I asked you about homebuilder sentiment. How has that sentiment changed in the time since we last spoke about it-which has been, as we noted, nearly a year? The Fed doesn't directly affect mortgage rates, but policy moves can indirectly affect them. And as we know, the Fed has been holding the fed funds rate fairly steady. Is this something that is now baked into the buyer's mentality?

Purviance: Well, I remember last year. I talked to homebuilders a lot and they were pretty eager, let's say, for the Fed to cut rates-and we had a couple of rate cuts at the end of last year, and then mortgage rates went up. And so, just to your point, the Fed doesn't necessarily have a direct impact on mortgage rates, as a lot of people expect. Homebuilders, like I mentioned before, came into this year expecting rates to come down, and they were expecting demand to improve. None of that has really materialized. And so, like I mentioned, they've had to maintain higher incentives in order to get people to buy. All of that's resulted in pretty sour homebuilder sentiment. They're cautiously optimistic, in that there is some price elasticity that's starting to materialize-meaning that, "OK, we've dropped prices, we've offered all of these incentives." That's starting to move some buyers off the fence. Buyers are starting to realize that, yes, this is an opportunity for me to buy. And so that's given builders some encouragement. One of the big things that they're concerned about is an increase in spec inventory. So, builders would build a home that's not pre-sold, that's speculative, and you put it on the market hoping someone would buy it. That's the worst kind of inventory to have, because if you have a buildup of spec inventory, that means the builder's paying interest on a finished home that they can't move. And so, they're willing to offer a whole lot of incentives and price cuts in order to get that inventory off the market. There is some nervousness, depending on the market, that spec inventory will sit and not sell, and we're moving into a slower time of the year anyway. And so you get to the end of the year, builders are really amped up about getting that inventory off the books. And so, to me it is yet to be seen whether or not we get through it. If there's a buildup of spec inventory, it's not something that I'm as concerned about, given the fact that buyers are starting to get off the fence with the incentives. But that's the thing that builders are concerned about. They were expecting the ability to be able to pull back on incentives this year. That hasn't really materialized, and homebuilder sentiment is very low at the moment as a result.

Heintjes: Well, speaking of expectations, we've now reached the portion of our episode where I'm going to ask you to look into your crystal ball. I can't let you leave without having you take out your crystal ball. And like always, of course, we won't hold you to anything you say, but as we're in the third quarter of the year and looking at 2026 around the corner, what do you think we can expect in the near term in housing, given all the factors we've been discussing today?

Purviance: In a weird way, uncertainty can become certain, if that makes sense-meaning that at some point, the market can adjust to the fact that uncertainty is just going to be a reality. And I think when people are uncertain initially, they tend to be more hesitant to make a decision. But when they adjust to the reality that uncertainty is just certain, they're willing to start making decisions about buying: "Okay, I need to buy this house. I got married, we've got kids." They're seeing interest rates come down a little bit, they're seeing home prices come down a little bit. I think at a certain point, buyers will get to a point where they're comfortable. We're starting to see that a little bit in the new home market, whereas prices get lower and incentives get stronger, people are willing to buy. And so, I think if the price is advantageous, if there are greater incentives, and if there's a need there, I think there'll be people who will see an opportunity to buy. Now, the concern is whether or not a price correction turns into a significant price correction, or even a crash in prices in certain markets. Then I think you're going to see people be increasingly hesitant to buy something that's declining in value. So it really depends on the market. Stronger markets with stronger economies-say, like Atlanta or Nashville in our district-we're seeing some softening in those markets, but there's enough economic strength to keep people comfortable enough to make a buying decision. Other markets-I would say in central Florida, northern Florida like Orlando or Tampa-it's a little bit weaker. Southwest Florida, we're seeing significant weakness. I think it may be a while before price finds a bottom, in order for people to feel comfortable in making a decision. I would say that even though we're in an uncertain economic climate, if we maintain that status and we don't enter into recession, or there isn't some significant collapse in the economy, I think people will get comfortable enough where prices are to make buying decisions, all other things being equal.

Heintjes: Well, a few things there to keep an eye on. Domonic, as always, I want to thank you so much for your time today. It's always great to catch up with you, and I look forward to having you back on the podcast in the near future. And let's not let another year slip by, OK?

Purviance: Yes sir.

Heintjes: But before we end this episode, I want to encourage you again to visit Domonic's Home Ownership Affordability Monitor here at the Atlanta Fed-we'll have a link to it on our website at atlantafed.org, where you will also find lots of other interesting information about the regional and national economy. And that brings us to the end of another episode of theEconomy Matters podcast. I'm Tom Heintjes, managing editor of the Atlanta Fed'sEconomy Matters digital magazine. Thanks for spending time with us today, and let's get together again soon.