The signs of a slowdown in the housing market are beginning to pile up.
Some recent examples below.
New U.S. home-building activity fell to a nine-month low in June and permits for new construction projects slipped as well, the latest indication of a cooling housing market as surging mortgage rates reduce affordability.
While multi-family construction gained ground as rising rents burnish the appeal of apartment projects, cushioning the overall decline, activity in the single-family segment dropped to a two-year low. Housing overall is set to have been a drag on U.S. gross domestic product in the second quarter.
Housing starts fell 2% to a seasonally adjusted annual rate of 1.559 million units last month, the lowest level since September 2021, the Commerce Department said on Tuesday. Data for May was revised higher to a rate of 1.591 million units from the previously reported 1.549 million units…
The housing market, which is very sensitive to interest rates, has softened notably this year as the Federal Reserve lifts rates aggressively to blunt inflation that is running at its highest pace in four decades. The average contract rate on a 30-year fixed-rate mortgage climbed to nearly 6% in June, up from about 3.3% at the start of the year, which has put home purchases out of reach for a growing number of prospective buyers, particularly first-time purchasers.
While it is unclear how much higher mortgage rates will climb, it’s almost certain they will remain high for some time with the Fed set to raise interest rates again at its policy meeting next week and more hikes to come through the end of the year.
An Oxford Economics index out last week showed homes were the least affordable in the first quarter of 2022 at any time since the 2007-2009 financial crisis, and it forecast that picture would worsen through the rest of this year.
U.S. home builder sentiment plummeted in July to its lowest level since the early months of the coronavirus pandemic, as high inflation and the steepest borrowing costs in more than a decade brought customer traffic to a near standstill.
At the same time, a gauge of activity in the services sector activity in the U.S. Northeast turned negative this month for the first time in a year, and firms there do not see an improvement over the next six months.
The National Association of Home Builders/Wells Fargo Housing Market Index fell for a seventh straight month to 55, the lowest level since May 2020, from 67 in June, NAHB said in a statement on Monday. Readings above 50 mean more builders view market conditions as favorable than poor.
July’s reading was below all 31 estimates in a Reuters poll of economists, which had a median expectation for a decline to 65. Moreover, the 12-point drop was the second-largest in the history of the series dating to 1985, exceeded only by the 42-point plunge in April 2020 when most of the country was under a COVID-19 lockdown.
In theory, of course, this is self-correcting. There is a structural shortage of housing in this country. If fewer new homes are going to be built then that’s a problem that’s not going away (especially as not enough homes have been built for years), and that ought to put some sort of floor under prices.
In theory (sort of).
Nevertheless, if a home is not affordable, it is not affordable.
Reuters:
In addition to the weakness in the new home market recently evident in the NAHB and housing starts data, sales of existing homes have fallen for four consecutive months through May and data due on Wednesday from the National Association of Realtors is expected to show that decline continued in June, with a sales pace seen at the lowest since June 2020.
The slowdown in sales would typically be seen as a leading indicator of falling prices. Here and there, prices have indeed been falling. In June, Fox Business reported, Realtor.com had found that housing prices had begun to moving down in certain cities.
Soaring borrowing costs are only part of the issue. Stock-market turmoil and recession fears do little for buyer confidence. And with the country now in a form of Covid normalcy, many of the people who were apt to make pandemic-inspired relocations have already done so.
On the other hand, to put things in some sort of perspective, Bloomberg adds:
[M]ost sellers are in a position to reap big profits because they’re sitting on a mountain of equity. In May, US single-family house prices jumped almost 45% from May 2020, the biggest two-year increase on record, according to an analysis of National Association of Realtors data going back to 1968. That capped off a decade of rapid gains.
That means even if homeowners lose jobs in a recession, they’re unlikely to be forced to sell at a loss, limiting the prospects of a widespread foreclosure crisis. And unlike the subprime loans that tanked the economy 14 years ago, the latest boom was built on ultra-low mortgage rates, not risky lending, with demand far outstripping supply.
Fortunately for borrowers, the most common mortgage term in the U.S is for 30 years (which typically translates as a term of 10-15 years), generally because of the time between moves). Nevertheless, if ultra-low rates really do revert to some kind of mean, the impact on housing prices could be . . . interesting.
There is, however, an argument, based on historical data, that housing is a decent hedge against inflation. Housing passed that test in the inflationary 1970s, when it was one of the better performing assets. On the basis of that precedent, if inflation is back, housing should be fine. On the other hand, housing’s ability to keep pace with prices during the disco era can be seen as a continuation of the pattern from the mid 1950s onwards during which inflation and home prices moved (very roughly) in tandem. The problem now is that that link snapped at some point from in the late 1990s. After then, housing outpaced inflation, at least as generally understood, a divergence that resumed after the crash that accompanied the financial crisis thanks to ultra-low rates and, eventually, the pandemic effect. To be sure, the old link with inflation may be restored, but will it take a sell-off in home prices before it is?
As mentioned above, no one (well, there will always be someone) seems to be expecting the sort of collapse in prices that we saw during the financial crisis, but if we have left the era of ultra-low rates behind us for good it would not be entirely surprising if there is some relatively heavy sledding ahead.
That’s not a prediction — there are too many known and unknown unknowns about — but it’s going to be worth watching some of the data in the next few months.