America’s Homebuilders Are Feeling A Lot Better

While previewing this week’s sparse collection of scheduled US macro data, I suggested the Fed should be on alert for evidence that housing is picking up again.

The issue is simple: With stocks in a bull market and home prices still far closer to the record highs seen last summer than pre-pandemic levels, it’s eminently possible that monetary policy hasn’t done enough to squelch the wealth effect, which may in turn be a factor in explaining the persistence of core inflation.

During Q1, gains for US equities didn’t just offset a decline in property values for US households, the increase in stock portfolios covered the modest drop in real estate prices four times over. That, during a quarter defined by a mini-banking sector crisis. If property prices start to rise again and stocks don’t cool off, the Fed’s plan to engineer below-trend growth in the service of fighting inflation could be undermined by a rekindled spending impulse.

Housing market aficionados (and Fed officials) insist that “rate-sensitive” housing suffered a downturn last year. Homebuilders use words like “recession.” It’s true that residential investment was a drag on US GDP for seven consecutive quarters, a streak which, in the past, might’ve accompanied a broader economic downturn. But I’m not sure “recession” is the best word for a market where serious prices declines have so far been confined to regions that enjoyed year after year of meteoric appreciation, and where homebuilders are among the year’s best-performing stocks.

We’ve all read voluminous coverage of the rally in US mega-cap tech stocks. But for all the media attention accorded to the A.I. bubble, a gauge of companies whose fortunes are tethered to residential building has improbably kept pace with the Nasdaq 100.

The dearth of resale supply is a boon to builders who, while still struggling with the pandemic’s legacy on several fronts, have a void to fill in terms of demand. Buyers facing a lack of available existing homes are ready and willing to leap off the sidelines whenever rates tick a few basis points lower. And the perception among both parties (buyers and builders) is that the end of the Fed’s tightening cycle is close at hand.

Together, those factors bolstered builder sentiment in 2023. On Monday, the NAHB’s gauge printed an above-consensus 55 for June, the highest in 11 months.

Sentiment is up every month this year — after falling every month during 2022. Monday’s release cited the factors mentioned above, from demand to the shortage of resale supply to the end of Fed hikes.

“Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains,” NAHB Chairman Alicia Huey said. One impediment, though, is the outlook for construction and development loans as regional lenders remain cautious following March’s unfortunate banking sector theatrics.

NAHB Chief Economist Robert Dietz noted that June was the first time in a year that gauges of both current and future sales were higher than 60. Buyers, he suggested, may be acclimating to a new normal of higher rates.

“The Fed nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans,” he went on, before warning on the spiraling cost of keeping a roof over one’s head in America. “Shelter cost growth is now the leading source of inflation,” Dietz prodded, encouraging the Fed and lawmakers to consider “how the state of home building is critical for the inflation outlook and the future of monetary policy.”

Frankly, there isn’t an easy answer here if you’re the Fed. Prices need to be much lower, and it’ll take years to backfill the necessary supply. Lower rates might help bring some resale inventory to market, but that risks being self-defeating if it leads to another bout of price appreciation. Turning the screws on the market with even higher rates or accelerated MBS runoff could help bring down prices, but it also risks a crash at the expense of everyone who bought near the top of the pandemic frenzy. Maybe policymakers should’ve thought twice before perpetuating that frenzy in the first place.

The other option for creating a more hospitable market is a federal solution to address what many believe is a burgeoning national crisis. So, real reform — a structural, whole-of-government solution out of Washington. [Insert sitcom laugh track.]

The share of homebuilders lowering prices in June was 25%, the NAHB said. That figure was 36% in November, when mortgage rates peaked.