(00:00) [Music] Welcome to the Deerwood Realty YouTube channel. I'm John Schink, founder and managing broker of Deerwood Realty in St. Louis, Missouri. Did you have a good Thanksgiving? I didn't get many videos out, but I wanted to go over this article I saw today to get back in the holiday spirit. It's from CNN and says, "New home sales fell flat last month as mortgage rate hit 2023 high." For the longest time, people have talked about how great it is that the new home segment is doing so well, that means the economy can't be doing terribly. But after a while, people got wise to it. They figured out that the builders were not cutting prices yet but were offering rate buydowns for the next 2 years so that, in theory, down the road, the home buyers could refinance. I always think there are times when it makes sense to buy new construction, but I was a little suspect in the last couple of months because the prices were just ridiculously high for new construction.

(01:33) Let's get into the article. It says, "New home sales in the United States fell in October as typical mortgage rates reached their highest levels this year. Sales of newly constructed homes fell 5.6% in October to a seasonally adjusted annual rate of 679,000 from a revised rate of 719,000 in September, according to a joint report from the US Department of Housing and Urban Development and the Census Bureau. Sales were up 17.7% from a year ago." This was below analysts' expectation of an annualized sales pace of 723,000. It's not good, but it's not just awful. "The constrained resale home market has continued to benefit the new home market because new homes are often the only option readily available as many owners continue to remain in place with their favorable interest rates."

(02:30) The argument has been you can't buy a used home because there aren't any available, so the only way to do it is to buy new. The problem with buying new, from my perspective as a real estate agent, is, say you put down money to buy a house today, it's 6 months before that thing gets built, if you're lucky, and it could be longer. Can the market change dramatically in 6 months? Well, I think it can. I think the market can change almost overnight. It doesn't happen very often, but I've always been concerned with the people that I help with new construction. It's like, this is the price now, but we have no idea 6 months from now if this is going to make any sense.

(03:19) New home builders often offer more financing options for home buyers. They are able to buy down mortgage rates to make their offerings more attractive than the resale market. To buy down the mortgage rate, the home builder can subsidize a portion of the interest rate for a specified period, usually one or two years, making it more affordable for home buyers in the near term. In the event that rates are lower a couple of years from now, the homeowner can refinance into a loan with lower monthly payments for the life of the loan, if the house appraises. If it does not, now you get to bring money to the table, and you're already paying a tremendous amount of money in this market.

(04:14) I don't know as far as offering more financing options are concerned, but what we had with the new home builders is everybody, like all the national home builders, saying how they're just managing to really do well in the face of adversity because they can offer these rate buydowns. Now, what happens when the pace slows? What happens when just offering these buydowns isn't enough? Then are we finally going to see the drop in prices that there should be?

(04:50) With mortgage rates anticipated to drop in the coming year, more resale homes may go on the market. However, there remains a significant pent-up demand from buyers. Okay, so mortgage rates have anticipated, like in theory, you don't really want to enjoy mortgage rates going down because that means that the economy is not doing so hot. So that's always been my kind of concern there.

(05:16) We've underbuilt homes compared to household growth for more than the past decade, and this mismatch has allowed pricing in many metro areas to continue to rise as households compete for the limited number of available homes. That is one way to look at the situation. I would say that the inflation caused by the printing press of the federal government has caused house prices to become unattainable, as well as anything that's financed, anything that takes cheap money. So you see a tremendous amount of investment in real estate, but you also see the effects of inflation in the asking prices of the homes.

(05:47) Can this continue as long as wage growth continues to climb? That's fine, but I haven't seen anything that's really compelling for wage growth increasing. So people are getting massively squeezed. But anyway, I wanted to go over that article with you. What do you think? Do you think this is the start of the fall of home prices? You've got more leases available of single-family homes than you've had for quite some time. You've got a pretty much stuck used house market, and now you've got lower prices, or you're going to have lower prices if this continues in the new home segment. So I don't know. I thought it was an interesting article, wanted to bring it to your attention. Put something in the comments. Have a good Monday. Thanks for watching. I'll see you tomorrow.