The Expert Podcast

Is the party over for home construction for new house building contracts? Well, according to a survey of sentiment of large builders, it's scary times. Some builders are slashing production and slowing construction because they feel that the future is not going to be there for buyers. A broad slowdown is the way it's called.

What are you seeing in your market? Are you a builder? Are you a supplier to a builder? Are you seeing this slowdown? Again, this is a sentiment survey, not necessarily a financial management survey.

The financial side of it says that there's a fact: data shows a 31% reduction in new home sales, and cancellation rates jumped in June. So, if you're a builder and you see people canceling contracts, you're going to be scared. But is this temporary? Is this a permanent pullback? It's not that people are looking to dump homes and sell houses like they did in the financial crisis. It's just that some buyers are starting to go on pause and say, "Look, I don't know if I want to jump in at these prices."

Look at these cancellation rates from year over year—the red is 2021, and the blue is 2022. They're all off the charts for cancellations of contracts. So, if you're a builder, you might be panicking. In fact, a quarter of home builders are reducing prices.

A couple of reasons why these contracts are being canceled: Mortgage rates are high, and some people think home prices are too high—which maybe they are. The problem, though, is if you're a home buyer or someone who wants to buy a home, you have to have a place to live. If you're renting, you still have to buy somewhere. Are there going to be deals? That remains to be seen.

This is kind of a shakeout period. The next few months—between now and the end of the big buying season—are really going to determine what happens over the next year. Are the people who want to buy a house going to be resigned and surrender to the fact that they just need to keep renting? Are we going to become a nation of renters because home values have become excessive? Are more people going to rent single-family homes, not just apartments, because the price is too high?

Is that going to create a problem for the financial future? Many people are able to retire because they bought a house 20–30 years ago, paid it off, and have no mortgage. Then you can retire. But if you still have a rent of two, three, or four thousand dollars, you have to be on the treadmill chasing that rent every month. If your rent is $3,200 right now, what's it going to be in 20 years?

So, buying a house might seem expensive, but are there enough people willing to jump in at the current rate of mortgage interest and sales prices to keep this housing market going? And if they don't, what does that mean for the future?

There are still more households being formed—more people needing a place to live every single month. If new homes aren't being produced, where are these people going to live? Apartment complexes are being built, but not single-family homes. So, is there going to be a higher percentage of people renting in five or ten years?

And what does that mean for the financial future? People who have nothing to fall back on and have a permanent monthly expense that never goes away. Because you pay off a mortgage in 20 or 30 years—but you don’t pay off rent. Rent lasts forever. It's permanent.