More Cracks In The US Housing Market
Numbers Not Seen Since 2008...
Now, there’s something that we don’t see enough people discussing when it comes to the current state of the US housing market. A metric showing numbers not seen since 2008... and that is cancellation rates.
You see, a cancellation occurs when the buyer of the property changes his mind and decides to back out of the deal. It is definitely not an easy decision for the buyer as it involves the loss of the initial deposit that he made, but in certain instances when the buyer feels that he is significantly overpaying with regards to where the market is headed next, he prefers to lose a few thousand dollars now, rather than entering into a deal that might end up costing him tens if not hundreds of thousands. We usually see a meaningful increase in cancellations right before and/or during a recession as a result of the uncertainty that lies ahead.
KB Home’s most recent earnings report showed a shocking 68% cancellation rate, effectively meaning that over 2/3 of all home buyers in the quarter decided that it was better for them to walk away from the deal and LOSE their deposit than it is to actually purchase the property.
However, this is a huge problem for the builders as when somebody cancels their contract, KB Home or any of the other huge home builders in the country can’t simply reverse all the work and resources that they had already put and invested into that property and just leave it.. obviously, they need to finish building the property and hope that another buyer will come in and buy it in the future. It all sounds fine if we are talking about a single property or maybe an area where such a trend was noticed. However, think about what the repercussions could be for these builders and for the real estate market as a whole if tens of thousands of deals get canceled…
Remember, that KB Home is the 6th largest home builder in the country and not just a small development firm. Thus, such information and numbers should definitely raise some eyebrows.
Did you know that there are currently almost 800,000 Single-Family homes under construction in the US that are going to hit the market this year? There have been only 2 other occasions over the last 50 years where we had seen such levels of overbuilding. The first one was back in 1976-1978 when the demographic forces behind the real estate market boom and the inflationary crisis back then were drastically different than the ones we are seeing today. The next one was in the 2006-2008 period, and we all know and remember very well what happened then.
Well, we are back at the same levels today, but with a slowing economy, rising interest rates, sticky inflation sitting a lot higher than the 2% target and an unemployment rate that is most likely going to double over the next 6 months as a result of the massive layoffs that we are continuing to see across the country.
Now, this is not meant to scare you out of the market or to cause you to make an emotional decision regarding your real estate investing portfolio, as you should always look at your own personal situation, financial goals, and liquidity and consult with a professional before deciding what the best course of action is for you. However, keeping an eye on these developing trends can prove to be an activity with a very high ROI as there will undoubtedly be many fantastic opportunities to invest in real estate that will present themselves over the next 12 months and only those that pay attention will be able to capitalize on them.