US housing starts are resilient in the face of surging mortgage rates. And that shouldn’t surprise anyone.
Starts ran at a 1.793 million rate in March, up 0.3% from upwardly revised February levels (figure below), data out Tuesday showed.
That nearly matched the most optimistic guess from 57 economists. It was also the briskest pace since summer 2006.
The highest estimate was 1.8 million, the lowest 1.6 million.
Notably, the beat was skewed towards multifamily construction. Single-family starts, permits and completions all fell, but the pace of single-family starts was above 1 million — for the 20th consecutive month (figure below).
The data came as mortgage rates touched 5% for the first time in a decade. A gauge of builder sentiment fell to the lowest since September this month while remaining above pre-COVID levels.
Deep-pocketed investors are gradually crowding out individuals and families. Redfin data showed investors bought a record 18.4% of US homes sold in Q4, three quarters of which were purchased in cash. That’s making it more difficult for average people to afford a home.
Read more: As Mortgage Rates Soar, Rich Investors Corner Market With Cash
If you’re wondering whether higher rates “should” be impacting starts already, the answer is “no.” When the market is tight, builders will build.
“A 100bps increase in mortgage rates slows housing starts by 13% when the housing vacancy rate is above 2% but starts are essentially unresponsive to changes in mortgage rates when the vacancy rate is below 1%,” Goldman said Monday. The figure on the right (below) illustrates the point.
“When housing markets are tight, like they are today, homebuilders are likely to keep building because they have little fear that homes will sit vacant after completion,” Goldman went on to write, in the same note. The bank sees starts totaling 1.7 million in 2022, up 5%.
Measures of backlogs remained very elevated in March, Tuesday’s data showed. Until supply catches up, it’s premature to call any tops.
That said, I’d make two simple (and related) observations. First, for average families, the run up in prices (and now the surge in rates) may mean buying isn’t desirable even if there’s something they can afford. For example, have a look at listings for between $250,000 and $400,000 in third-tier US cities. What you’ll discover are homes that, in many cases, wouldn’t be any semblance of aspirational for a family currently renting a reasonably spacious, nice apartment. There’s very little incentive for a family of modest financial means to burn up their life savings on a home that would’ve cost less than $200,000 pre-pandemic. Simply put, such homes aren’t very nice. Home buying is supposed to be a watershed moment in people’s lives, not a depressing experience wherein the kids start saying uncomfortable things like, “We liked the apartment better.”
Second, for families (or individuals) with adequate financial resources, the situation isn’t particularly vexing just yet. It’s just a matter of not getting what you think you “should” for the money. $600,000 doesn’t get you a mini-mansion anymore. In large cities, it barely gets you a decent two bedroom.
Extending that a bit further (and paraphrasing a handful of conversations I’ve had with acquaintances), young professionals with $200,000 salaries, six-figure down payments and near perfect credit aren’t enamored with the idea that they should have to “settle.” Two years ago, such borrowers were shopping for grandiose four bedrooms with pools and small theaters. Now, they’re pondering the prospect of more “humble” abodes. “Humble” is a very relative term in this context (hence the scare quotes), but suffice to say that based on brief chats I’ve had personally, there’s a sense among many young professionals that what the mortgage bankers are telling them they can afford is out of proportion with their objectively fortuitous economic circumstances.
Crocodile tears, I know. But the point isn’t “pity the future millionaires.” Rather, the point is that the market is hopelessly distorted.
Those are (mostly) anecdotal observations, but I try to spice things up when I can. Otherwise, what’s my value add?
Your 2 observations are dead on. I have one Millenial (just barely a millennial) that falls into category 1. I also have a Gen Z (an older version) that falls into category 2. The Gen Z has read “The Millionaire Next Door” more than once. I wish the Millennial would give up Uber Eats and HBO plus- but it isn’t my life.
I just keep telling them to look at history and note that $100 invested in the SP 500 in 1970, on average and assuming you reinvested dividends, and adjusted for inflation grew by 6.7% per year (about 10,9% before factoring in inflation) resulting in an investment balance of $2,860 in 2022.
This just might not be the best year to buy- that is the punchline.
They live in big California cities. The other idea to make a home purchase happen is to find something with “hidden” value”. Maybe a condo comes with 2 parking spaces-and if you only need one (rent the other one) or a SFH with an opportunity for a lock-off.
The rent vs. buy calculation most times favors the buy, if you have 5 + years you think you will occupy the house. Right now in many markets, that probably is not the case. What will change this? LIkely a period where prices lag incomes for some time. I would bet we are on the cusp of that right now. Note, this can happen slowly, but unless something changes that would be my bet. Also note, this is not a forecast for a housing market bust.
Folks. Housing is going down. The question is when and by how much. I personally think we’re at the beginning of 06 right now when investors could still justify spending 70% over asking with all cash, even though the market had already peaked.
Take Los Angeles for instance (the frothiest of them all). It’s entire market exists in bubble and pop cycles. It peaked in 89. Bottomed in 95. 25% drawdown. Then peaked in 06. Bottomed in 2011. 40% drawdown. It recovered back to its 2006 numbers — in 2017. Currently, the norm is 1100 square foot starter homes (not flipped) listing at 995k and selling for 1.5 million. (And what’s really mysterious is how open houses have almost NO traffic, and houses get 3 offers instead of 55, yet the final bid up is the most aggressive it has ever been.)
Want some really scary numbers. Check out the previous peak to trough drawdowns in Miami, Phoenix, Vegas. -50%. -54%. -61%.
And consider this data point: Every time the housing market has had a double digit annual price increases after being at an all time high — that was the top.
Where did this occur in 2021? EVERY city in the entire country. (Phoenix had an annual price increase last year of 33%.)
Now, perhaps it’s different, and Goldman (who told us inflation would be under 2% in 2021), has no vested interest this time around. Or maybe DJ D-Sol has himself loaded up on some AirBNBs.
I thought I lived in a 3rd tier city, but based on these anecdotes I’m guessing not. Lot of price drops where I am.