Housing market down from last year’s high, staring at ‘perfect storm’

The housing market, both locally and nationally, isn’t showing any signs of clearing up.

Interest rates have been climbing consistently for the last few months, and the cost of housing construction has gone up 19 percent for building materials alone over the course of the last year, according to Eric Farrell, CEO of the Home Builders Association of Dayton.

Add to that a labor shortage, transportation costs and energy costs, and what you end up with is the housing market “staring into the face of a perfect storm,” Farrell told this news outlet Monday.

“Builders don’t know how much it’s going to cost to build a home, so they can’t build it on spec,” he said. “As a nation, the construction sector also has a breakdown in the supply chain (so) that everything from lumber to steel to appliances, our builders just don’t know when they’re going to get those materials, and they don’t know how much those materials are going to cost when they get them.”

That’s created an environment where home builders are becoming increasingly cautious in the ramp up in production, as evidenced by recently released HBA of Dayton permit data, which shows that 236 single-family permits were issued in April 2022, compared to 365 in 2021, representing a 35.3% decrease. Over the last five years, this total represents the second-lowest April reading in HBA Dayton permit reporting.

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Credit: JIM NOELKER

Credit: JIM NOELKER

Combining single-family, apartment, and condo units, a total of 897 residential new building permits were issued through April 2022, down 22.1% from 1,118 permits issued through April 2021. Farrell said the good news is that the April 2022 reading still represents the third highest permit data since the HBA began tracking data in 2006.

“This year’s aggregated permit data still is on pace to a banner year, it just won’t match last year’s high,” Farrell said.

The housing market right now is “an interesting ladder,” he said. While existing homes play a huge part of it, replacement homes must be coming onto the market as well, Farrell said.

“As somebody is selling their house, they need to have a place to move into, and now that perfect storm also is in a rise in interest rates and a rise in home prices,” he said.

Last week, the Federal Reserve raised interest rates by 75 basis points (0.75%). That federal rate contributes to other interest rates, including the average for a 30-year fixed-rate mortgage, which is now 5.78%. Both the increase and the mortgage rate are the highest they’ve been in years.

The 30-year mortgage rate was 3.3% in the early 2020s, 4.1% in the early 2010s and north of 6% in the early 2000s. In the 1970s to 1990s, they ranged from 8% to north of 12.5%.

“They are still historically low, but from a recency standpoint, they definitely are high,” he said.

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The housing market is an interest-rate sensitive industry, so it is natural to expect that higher borrowing costs will impact homebuyer demand, Farrell said.

While there is a lot of talk about how today’s market compares to 2008, 2009 and 2010, the circumstances this time around are “vastly different,” Farrell said. Mortgages have been more properly underwritten during this last cycle and there exists a “much more stable” financial sector.

“What’s causing the problem now is the supply shortage,” he said.

Economists say the nation is anywhere from 1 million to 5 million homes short of what it needs to keep up with demand, Farrell said.

“The Miami Valley Regional Planning Commission did a comprehensive housing study,” he said. “The city of Dayton has done comprehensive housing studies and I would ... argue that we’re probably 20,000 homes short of where we need to be.”

The cost of lumber has come down from its record-high of $1,600 per 1,000-board feet in April 2021 to below $600 per 1,000 board feet, according to National Home Builders Association data. However, “all the other materials are spiking,” Farrell said.

“We’re looking at about a 20% increase at the cost of a new construction home right now with all the other materials,” Farrell said.

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When it comes to housing, there are five Ls: labor, lumber (which are materials), land, lending and laws, Farrell said. So how does that affect the local market?

“We can’t control the first four I mentioned,” Farrell said. “Laws is something we can have real conversations about at the local level.”

He referred to permitting laws, zoning regulations, land use policies and building specs as things to examine.

Given all the outside factors, especially inflation, it is too difficult to predict when the “perfect storm” might subside, Farrell said, adding that interest rates could rise again this year.

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Home prices in the Dayton area increased slightly in April, with the average price increasing nearly 10 percent to $245,429 and the median price increasing 11 percent to $212,000, according to Dayton Realtors Multiple Listing Service.

That continued a significant upward trend. However, the number of sales for single-family homes and condominiums in the region dropped 3 percent, with 1,312 sales reported, compared with the 1,357 sales in April 2021.

“If you look back over the course of the past year or so, you’ll see there are some months that are down a little bit and there are more months, as of the past year or two, that have been up,” said Bob Jones, director of communications for Dayton Realtors.

Jones said the number of homes sold dipped by slightly less than 1 percent in the first quarter of 2022 compared to the first quarter of 2021. Sales volume generated by April’s activity totaled $322 million, a 6 percent increase from April 2021.

“It has been a number of years since we’ve seen a year over year decrease in the total volume,” Jones said. “It has been steadily increasing.”

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