New home report: ‘2024 will be an ugly year’ for Reno-Sparks’ new housing market

This year is shaping up to be deja vu all over again for the Reno-Sparks new housing market, with stubbornly high mortgage rates and elevated prices for buyers.

The low number of new homes sold during the first quarter of 2024 mirrored 2023, averaging a little over 100 a month, according to an analysis of Washoe County new housing data by the Center for Regional Studies at the University of Nevada, Reno.

Sales of new houses in 2023 plummeted after the robust numbers of the COVID-19 years. 2023 sales were also lower compared to 2019, the last full year before the pandemic.

The trend means builders will be offering homes with a smaller footprint in an effort to keep prices lower. For homebuyers, that means more new homes available between 1,300 square feet to a little over 2,000 square feet. Options will still be there for 3,000-square-foot “McMansions,” but at a much higher price.

More on housing: Are Reno-Sparks apartments overbuilt?

With inflation still running higher than expected, mortgage rates are also projected to stay elevated this year. The earliest industry watchers expect to see a rate cut by the Federal Reserve would be September, with no cuts until 2025 being a strong possibility as well.

The headwinds from high prices and mortgage rates point to a lackluster year for new home sales as more homebuyers hesitate to buy while demand still stays strong enough to keep the median price elevated, according to Brian Bonnenfant, project manager for the Center for Regional Studies.

“2024 will be an ugly year,” Bonnenfant said. “It will be just like 2023.”

By the numbers: Second verse, same as the first

The COVID-19 pandemic ushered in an unexpected housing boom as the rise of remote work fueled the sales of single-family homes, including new housing.

Unit sales for new homes in Reno-Sparks spiked from 2020 to 2022, which also saw prices start to breach $600,000 starting in April 2022 after hovering between $450,000 and $500,000 during the previous three years.

Housing sales remained strong during the later years of the pandemic even as the Federal Reserve started raising interest rates in March 2022. By November of that year, however, the impact of multiple rate hikes started to take its toll, and new home sales fell to 86 units that month, a steep drop from 186 in 2021 and 185 the year before for the same period.

The trend would continue throughout 2023. The average monthly sales of 102 houses in 2023 was the lowest recorded in the last five years.

Here are annual sales for new homes and monthly average from the last five years:

• 2023: 1,219 units or 102 per month
• 2022: 1,829 units or 152 per month
• 2021: 2,240 units or 187 per month
• 2020: 1,942 units or 162 per month
• 2019: 1,525 units or 127 per month

The drop in sales was especially noticeable last summer, which is usually the busy season for the housing market. Last July recorded just 83 sales compared to 151, 219 and 201 during the same month in the previous three years.

“We saw demand fall apart last year in July,“ Bonnenfant said. “When mortgage rates went up, sellers locked down and buyers disappeared.”

Homebuyers are reacting to higher home prices in various ways, said Robert Bartshe, president of the Sierra Nevada Realtors association.

Some end up buying smaller houses or townhomes and condos. Others opt to buy outside of the city’s core or in more rural areas.

“The reaction to higher home prices and rates in our market varies depending on a homebuyer’s circumstances,“ Bartshe said.

“Some have chosen to hold off on purchasing a home until rates become more favorable, while others are taking advantage of current market conditions, knowing that refinancing is an option when rates decrease.“

New home pricing in Reno-Sparks is still high despite drop in unit sales

Even with lagging sales, the median price for a new house remains elevated.

The median sales price for a new single-family home in Reno-Sparks was $574,680 in March. Although not as high as last year and 2022, when some months topped $650,000, it is still higher than any month from January 2019 to September 2021.

Last year also saw the highest median price ever recorded for new single-family homes Reno-Sparks — $676,434 in July.

Granted, the median price for new single-family homes is more volatile compared to existing homes. New home prices are subject to peaks and troughs month to month compared to existing homes, which have a larger supply to draw from.

The surges and dips in pricing are influenced by the kind of new housing entering the market, which can range from luxury homes such as Toll Brothers to more standard offerings from DR Horton.

“On the new side, you’ve got a variety of builders that build different products so if you get a run on Toll Brothers homes, you’re going to see that peak (in price),” Bonnenfant said.

“Once you start seeing a run on DR Horton (homes) in the North Valleys, you’re going to see that trough.”

To better compare the cost of new housing over different periods, one important indicator would be the price of homes per square foot.

As of March, the average price per square foot for a new home in Reno-Sparks was $274. The number is actually not far off from last July’s $280 per square foot — the same month when the $676,434 record median price was set for Reno-Sparks.

Despite the price per square foot being nearly the same, however, the median price in March of $574,680 was significantly lower.

So what does the discrepancy mean?

“What that means is the builders have been adjusting by building and selling a smaller footprint,” Bonnenfant said.

In short, new home builders are building smaller homes to keep prices lower.

Construction costs are also a factor, Bonnenfant added.

“We’re seeing some impact from material price drops, which is what happens when the demand falls off,” Bonnenfant said. “Prices start dropping too with it.”

High mortgage rates are squeezing prospective homebuyers even more

At the same time, new home prices in Reno-Sparks remain high historically, with high mortgage rates squeezing housing affordability even more.

The rate for a 30-year fixed mortgage rose for four straight weeks to 7.28% in the end of April — the highest level since before Thanksgiving, according to the Mortgage Bankers Association. The mortgage rate finally fell slightly during the first week of May but still remains high for consumers used to a low-interest rate environment.

“The jump in mortgage rates has taken the wind out of the sails of the mortgage market,” said Bob Broeksmit, MBA president and CEO.

“Along with weaker affordability conditions, the lock-in effect continues to suppress existing inventory levels as many homeowners remain unwilling to sell their home to buy a new one at a higher price and mortgage rate.”

To show the impact of rate hikes, a $500,000 single-family house with a 2.5% mortgage rate would require a monthly payment of about $1,976, said Cory Hendersion, branch manager and loan officer for Reno lender Mann Mortgage.

In contrast, the same house with a 7.25% mortgage rate would have a monthly payment of $3,411 per month.

Even just a percent change in rates can add a couple hundred dollars to a monthly mortgage payment. Although a few hundred dollars might seem like a small amount to some, it adds up over time and can spell the difference between a borrower being able to afford a house payment or not.

“When you put (rates) in context like that, it really highlights the imbalance in affordability,” Henderson said.

The high rates are driving applications for a popular tool from the last housing bubble — adjustable rate mortgages — as a way for homebuyers to lower their monthly payments in the short term, according to Broeksmit.

The share of ARM loan applications rose to 7.8% at the end of April, the highest level so far this year.

One type of ARM that has seen an increase locally is the home equity line of credit or HELOC. A HELOC acts as a revolving line of credit that allows homeowners to borrow against the equity of their home. HELOCs account for 17% of the new applications Henderson has processed this year through April.

“I did four HELOCs last month, which is just crazy,” Henderson said, especially for a smaller local lender such as Mann Mortgage.

“I’ve done 15 HELOCs so far this year. I haven’t done 15 HELOCs (annually) in the last couple of years.”

One reason for the jump in HELOCs is that they provide better rates than credit cards. Today’s HELOCs also have much stricter requirements for borrowers to qualify compared to the housing bubble years leading to 2008.

Henderson says he is seeing a lot more homebuyers who are serious about buying now use a familiar tried-and-true strategy to afford a new mortgage: scrimping and saving.

One client ended up downsizing from her new car so she could lower her monthly car payment from $1,200 to $600.

“Just cut out anything that isn’t super necessary,” Henderson said. “If you’re paying $40 a month (for a streaming subscription) and only watching one program once a week, is it really worth it?”

New homes vs. existing homes: Value vs. location

With inflation increasing more than expected, hopes for a Fed rate cut this summer have faded.

Instead, industry watchers are now looking at the end of the year at the earliest for any relief on mortgage rates.

“Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer,” said Mike Fratantoni, chief economist at Mortgage Bankers Association.

“No doubt, this is a headwind for the housing and mortgage markets.”

For Reno-Sparks, this means sales likely staying at around 100 new homes per month, just like 2023, according to Bonnenfant.

One positive thing about new homes is that they are actually cheaper than an existing home . In March, the average price per square foot on an existing home was $314 compared to $274 for a new home. March’s median price of $574,680 for a new house is also slightly lower than the $575,000 median for an existing home.

“So you’re paying $40 more for an existing home with older pipes and problems maybe,” Bonnenfant said.

Other advantages for new homes include more modern features and customization options plus a one-year fit and finish warranty and a 10-year structural warranty in most cases, according to Sierra Nevada Realtors’ Bartshe.

Some new homebuilders are also offering incredible deals right now, including lower mortgage rates. DR Horton, for example, is allowing homebuyers to buy down their mortgage rate through points, allowing them to get rates such as 5.5%, Bonnenfant said.

Rate buydowns are the most impactful incentives offered by new home builders but not the only ones, according to Bartshe.

“In addition, builders have been offering additional incentives, including credits toward buyer’s closing costs, appliance packages, and in some instances even landscaping incentives,” Bartshe said.

Bartshe added that some sellers of existing homes also offer incentives such as buydown options and closing credits but it can still be tough to match some of the advantages of a new home. Instead, one of the key advantages of existing homes is often being located in well-established communities with mature trees, lower property taxes and proven infrastructure, he said.

Bonnenfant agreed.

“New homes always are a better value,” Bonnenfant said. “(The question is) where are they being built?”

“Then you bring transportation costs into the picture and that’s what really causes that hiccup between existing and new single-family homes,” Bonnenfant added. “It’s location, location, location.”

One potential bright spot for both new and existing homebuyers is the decision by the Fed at its last meeting to reduce the pace in which it lowers the money supply in the market, more technically known as a balance sheet reduction, Henderson said.

Since 2022, the Fed has been continuously reducing its balance sheet, which ballooned during COVID-19 after the U.S. government purchased more securities and injected more money in the system. The move, which is also called “quantitative easing,” increases liquidity in the market by keeping interest rates low and making borrowing easier.

Reversing the policy and reducing the money supply — known as “quantitative tightening” — allows a return to a more normal market but can also lead to a spike in interest rates if done too fast. The Fed’s decision to slow down the rate in which it reduces its balance sheet helps curb those sharp spikes while still steadily aiming toward its target.

“(The Fed has) to reduce its balance sheet runoff in order to get the maximum effect of lowering the federal funds rate,” Henderson said.

“But if you start lowering rates but keep reducing your balance sheet, it’s basically like driving a car with one foot on the brake and one foot on the gas.”

As to when those rate cuts will occur, that remains the million-dollar question.

High mortgage rates remain an albatross around the housing market’s neck, with the delay of expected rate cuts this year tempering some of the enthusiasm earlier this year about the housing market.

Lawrence Yun, chief economist for the National Association of Realtors, addressed the uncertainty surrounding rates during NAR’s 2024 Realtor’s Legislative Meetings earlier this month.

“I would have thought that, by now, rates would be lower and rate cuts would have begun,” Yun said.

“Whatever rate cut the Federal Reserve does not do this year will simply get pushed back to 2025. They’re calling for a September rate cut, but we’ll see.”

This article originally appeared on Reno Gazette Journal: New home report: ‘2024 will be an ugly year’ for Reno-Sparks’ new housing market