This developer is happy that new home construction is falling

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New York CNN  — 

Recent headlines point to a slumping US housing market — as mortgage rates average near 7%, an increasing number of potential homebuyers 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 homebuilders are undeterred.

David O’Reilly, CEO of the real estate developer Howard Hughes Corp., told CNN that he’s “cautiously optimistic” that the residential housing market is rebounding after a downturn in the second half of 2022.

Before the Bell spoke with 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 and gloom for the housing market. What are you seeing?

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. This, in my estimation, will be a very modest downturn. First, as a country, we’re short 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’re close to record lows in terms of inventory for homebuilders.

Sure, home prices are down but we’re just giving back some of the gains we saw in 2020. We’re still making an outsized profit relative to historical norms. When you hear about homebuilders buying down mortgage rates [contributing part of the purchase price upfront], they’re doing the things that they should do to help move inventory and they’re doing it very profitably.

Are you having issues attracting new buyers because of higher mortgage rates?

The mortgage rate is less impactful to homebuyers than the volatility of interest rates.

When interest rates are moving, rising or falling quickly, they create a pause amongst buyers because they want to know where it settles out. No one wants to lock in if they think the mortgage could be cheaper in a month. I think homebuilders have, to a large extent over the past several months, tried to take some of the volatility out of the market. Some of the volatility has come out naturally as the rate increases have been consistent with expectations and mortgage rates have behaved normally, but some of the risk and uncertainty has been taken out because home builders are saying we’re gonna lock in your rate at, you know, 4.99% or 5%, for a year or two.

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

Are we in a housing recession?

In the second half of 2022 we saw a meaningful downturn in home sales nationally. We saw meaningful reductions across the board. But I’m cautiously optimistic that we’re starting to see a turn. I find it encouraging that home sales for the past several months have increased.

But what about new housing starts? Construction is falling.

New housing starts continue to fall — to me, that’s great news. During the second half of 2022 we saw the cancellation rate on new home sales surge. Those cancellations left a lot of standing inventory — home builders with homes that they were building for someone that canceled sitting on them.

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

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

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

ADP’s private payroll report for February and the JOLTS job openings, hires and quits report for January are expected Wednesday. On Thursday, Challenger, Gray & Christmas is set to release its job cuts numbers for February, and Friday brings the main show — the US jobs report for February.

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

▸ Speaking of the Fed, Chairman Jerome Powell will be on the hot seat this week as he testifies before the Senate on Tuesday and the House of Representatives on Wednesday. In his semi-annual report to lawmakers, Powell will likely stress that the Fed will need to take more action to get inflation back down to its 2% target. Investors will watch lawmakers question Powell, and he’ll likely 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 the next year. He’s promised that it will include tax hikes for the wealthy — something that Wall Street typically 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 to come. That means we’ll likely hear more about increasing capital gains taxes and taxes on controversial corporate stock buybacks, two policy proposals that also rattle investors.

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

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

John Schoettler, Amazon’s real estate chief, said the company is pushing back the new headquarters’ second-phase groundbreaking. The first phase is still under construction and 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 be eliminating more than 18,000 jobs, the largest cut in its history. Amazon hired rapidly in the early years of the pandemic and it is cutting costs as consumers shift their behavior.

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

That’s because investors want the company to reduce its expenses as revenue slows and the economic forecast remains dour. Jassy said during Amazon’s fourth quarter earnings report that he plans to do just that.

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