This property developer is happy that new housing construction is falling

New York (CNN) Recent headlines point to a declining US housing market – as mortgage interest rates average close to 7%, a growing number of potential home buyers are finding it difficult to finance homes.

Mortgage applications fell in late February to a 28-year low, according to the Mortgage Bankers Association. But some of the country’s largest house builders are undeterred.

David O’Reilly, CEO of real estate developer Howard Hughes Corp., told CNN he is “cautiously optimistic”[ads1]; that the housing market is about to rebound from a slump in the second half of 2022.

Before Bell talked to O’Reilly about Howard Hughes Corp. (HHC) and his outlook for the market.

This interview has been edited for clarity.

Recent data point to doom for the housing market. What do you see?

O’Reilly: I hear the headlines and they generate a lot of clicks, but I don’t see the death and destruction or anything close to what we saw during the global financial crisis. In my opinion, this will be a very modest decline. First, as a country, we lack between four and five million homes. We just haven’t built enough to keep up with household formation since the global financial crisis. In most markets, we are close to record lows when it comes to inventories for house builders.

Sure, home prices are down, but we’re only giving back some of the gains we saw in 2020. We’re still earning in excess of historical norms. When you hear about home builders buying down mortgage rates [contributing part of the purchase price upfront]they do the things they should do to help move inventory, and they do it very profitably.

Are you having trouble attracting new buyers due to higher mortgage rates?

The mortgage interest rate has less impact on home buyers than the volatility of interest rates.

When interest rates move, rise or fall quickly, they create pause among buyers because they want to know where it will play out. No one wants to lock themselves in if they think the mortgage could be cheaper in a month’s time. I think homebuilders have largely tried to take some of the volatility out of the market in recent months. Some of the volatility has come naturally as rate hikes have been in line with expectations and mortgage rates have behaved normally, but some of the risk and uncertainty has been removed because homebuilders are saying we’re going to lock your rate at, you know, 4.99% or 5 %, for a year or two.

While that 5% rate is much higher than the 3% rate of a couple of years ago, it gives the consumer the confidence to shop without the uncertainty of interest rate volatility.

Are we in a housing recession?

In the second half of 2022, we saw a significant decline in house sales nationally. We saw significant reductions across the board. But I am cautiously optimistic that we are starting to see a turnaround. I find it encouraging that house sales have increased in recent months.

But what about new housing starts? The building is falling.

New home starts continue to fall – for me that’s good news. During the second half of 2022, we saw the cancellation rate on sales of new homes. Those cancellations left a lot of standing inventory — homebuilders with homes they built for someone who canceled sitting on them.

The fact that they are selling more but building less tells me they are eating through inventory. And that’s a great sign for the rest of this year.

Jobs, Powell and Biden: What investors are watching this week

▸ It’s all about the labor market this week as a slew of February jobs data is due to be released.

Last month’s huge surprise – 517,000 jobs were added to the US economy when economists expected 185,000 – sent the stock market reeling. Investors are hoping the numbers come back down to earth to help cool the economy and inflation along with it. If they don’t, expect market volatility as the Fed will face more pressure to raise interest rates to keep prices in check.

ADP’s private wage report for February and the JOLTS report on vacancies, hires and terminations for January are expected on Wednesday. On Thursday, Challenger, Gray & Christmas will release the February job cuts figures, and on Friday comes the main show – the US jobs report for February.

Analysts expect the economy to have added 200,000 jobs in February, and the unemployment rate is expected to to remain at a historically low 3.4 percent.

▸ Speaking of the Fed, Chairman Jerome Powell will be in the hot seat this week when he testifies before the Senate on Tuesday and the House of Representatives on Wednesday. In his semiannual report to lawmakers, Powell is likely to stress that the Fed needs to take more action to bring inflation back to its 2% target. Investors will see lawmakers quiz Powell, and he is likely to be asked to defend his fight to cool the economy, which could hurt wage growth.

▸ President Joe Biden is also expected to unveil his federal budget proposal for next year. He has promised that it will include tax increases for the wealthy – something Wall Street usually doesn’t like to hear. While the president’s budget proposal is just that — a proposal — it will likely guide Democratic policy initiatives for the year ahead. That means we’ll likely hear more about raising capital gains taxes and taxes on controversial stock buybacks, two policy proposals that are also rattling investors.

Why Wall Street is celebrating Amazon cuts

Amazon made two recent announcements that don’t sound very good for the company — at least at face value.

The company is halting construction on its second headquarters in Northern Virginia, the company confirmed in a statement to CNN on Friday. Bloomberg first reported news of the break.

John Schoettler, Amazon’s chief real estate officer, said the company is pushing back the new headquarters’ second-phase groundbreaking. The first phase is still under construction and is expected to open in June.

The company’s decision to pause construction comes just two months after Amazon CEO Andy Jassy confirmed the company would eliminate more than 18,000 jobs, the largest cut in its history. Amazon hired quickly in the early years of the pandemic, and it is reducing costs as consumers change their behavior.

But Wall Street applauded the news on Friday. Amazon (AMZN) the stock rose 3% higher.

That’s because investors want the company to reduce its spending as revenue declines and the financial forecast remains bleak. Jassy said during Amazon’s fourth-quarter earnings report that he plans to do just that.

Amazon also announced Friday that it will close eight cashier-less brick-and-mortar stores in Seattle, New York and San Francisco.