The animal spirits are stirring.
Hot on the heels of data showing the biggest month-to-month percentage increase in nominal US retail sales since the final round of stimulus checks, a key gauge of homebuilder sentiment surprised to the upside.
The NAHB index, which fell every month in 2022 amid a rapid rise in mortgage rates, rose to 42 this month, the highest since September.
That topped the most optimistic estimate from the three dozen forecasters who ventured a guess, and underscored the extent to which the recent easing in financial conditions has the potential to rekindle housing activity at the possible risk of embedding a latent re-acceleration in shelter inflation following a guaranteed decline set to play out later this year on a lag.
At 48, a gauge of forward-looking sentiment for single-family sales was the highest since July.
“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” NAHB chief economist Robert Dietz said Wednesday. “Even as the Fed continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle.”
As ever, I’d gently suggest this might be a “be careful what you wish for” scenario. House prices had only just begun to fall late last year. The market isn’t even close to a meaningful correction from the pandemic boom.
Note that February’s increase on NAHB’s main index was the largest in a decade if you strip out the distortions from the pandemic.
There’s a sense in which relying on generous financing costs to make homes affordable is an example of papering over the real problem. Homes are unaffordable because they’re too expensive, not because mortgage rates are too high. Even at the peak in October, rates weren’t especially onerous from a historical perspective.
Someone, somewhere, needs to address the price problem. One solution entails more supply, and builders aren’t going to oblige if demand is hampered such that the only way to lure buyers is with incentives that erode margins already crimped by elevated costs for materials and labor.
So, if relief on mortgage rates can help ameliorate that situation and thereby encourage additional supply, that’s a positive development.
But you can’t dig out of a structural housing shortage in the space of a few months and demographics lean strongly in the direction of pent-up demand.
That combination is conducive to elevated prices, which means the only way to ensure people can afford a home is to suppress the cost of financing such that everyday people are tempted to leverage themselves five times (or more) on a half-million dollar asset. To me, that seems like an odd definition of the word “afford,” especially when the median household brings in just $75,000 during a good year.
“With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” NAHB Chairman Alicia Huey, a custom home builder from Birmingham, remarked. “The nation continues to face a sizable shortage that can only be closed by building more affordable, attainable housing.”
The key words there are “affordable” and “attainable.” It beggars belief that the current median price for new, single-family homes in America counts as “affordable” for the median American family.
“But you can’t dig out of a structural housing shortage in the space of a few months and demographics lean strongly in the direction of pent up demand.”
This is going to be an issue for at least a couple more decades. According to 2019 census data (so it is a bit dated), two-thirds of homeowners were 50 or older while they accounted for slightly under half of the overall population. It makes sense that older people would make up a higher proportion of homeowners relative to the overall population, but to your point, the generations coming up behind them are as large or larger than the baby boomer generation and owning your house is still a big part of the American dream.
On top of that, investors have been very active in the market the last couple years (although rising interest rates may have caused them to pull back more than non-investors), construction isn’t getting any more efficient, and NIMBYism is still a huge problem in many places where people would like to live. Oh yeah, and the places people have been building like Florida and Texas are highly susceptible to climate change. Frankly, more and more people are going to be stuck renting and/or cramming more people into smaller spaces. Any price corrections from here on out will be minimal for the foreseeable future.
But hey, the metaverse can theoretically offer unlimited space. Just need to find a closet with enough space to accommodate basic physical movement.
The sad truth is that ‘we’ won’t allow affordable housing, in a broad sense. While in low income localities such a thing is desirable, in most areas of the US ever high(er) property values are desirable.
When property values fall, whether it’s new supply or curbed demand, home owners (or investment institutions) will have something to ‘say’ about it through their votes or donation dollars.
When I was a kid, growing up in a blue-collar, middle class neighborhood, a big house was 1500 square feet…our house was 1200 square feet for a family of five.
My kids have homes ranging from mid 2000s to 4000s. There’s no way they would ever consider living in the type of house that I grew up in. Maybe that attitude plays a part in our current situation. The only time I see the “younger generation” settling for a small house is when it’s in a highly desirable neighborhood and square footage costs are astronomical.
By the way, I live in Texas and climate change hasn’t arrived here yet.
It’s still hot to really hot from late May until late October. It’s been that way my whole life.