New construction activity in the US rebounded last month from what, as initially reported anyway, was a four-year low.
Housing starts rose 3% in June to a 1.353 million rate, the government said Wednesday.
That was better than the 2% increase consensus expected and it came off a higher base — May’s pace was revised up to 1.314 million.
I don’t know if I’d call that “encouraging,” exactly. The whole thing — US housing, I mean — still feels like limbo.
Home builder sentiment slipped to a YTD low this month, the NAHB said, faulting the persistence of elevated mortgage rates. At 42, the headline print on the NAHB gauge for July missed estimates and constituted a decidedly lackluster result.
Note that the NAHB headline tends to be a good leading indicator for single-family housing starts. The relationship broke down from October of 2023 through February of 2024, but the two series have re-coupled.
As the figure shows, single-family starts are moving lower to meet the dour mood of builders. June’s increase in construction activity came courtesy of multi-family. Single-family starts were lower.
Relief’s on the way. Supposedly. Decelerating inflation points to lower policy rates — traders now consider September a virtual lock for the first Fed cut — and housing market participants are optimistic on that front. An NAHB measure of forward-looking sales expectations rose this month, suggesting builders believe mortgage rates are likely to fall, boosting demand.
The NAHB sees Fed cuts starting in Q4. “This will lower interest rates for home buyers, builders and developers,” chief economist Robert Dietz said, adding that regardless of what happens with the supply of existing properties (i.e., even if lower rates eventually loosen the “golden handcuffs”), the US still faces an inventory shortage, bullish for builders.
Permits beat expectations in the government’s new construction release on Wednesday, rising 3.4% to a 1.446 million pace. Consensus expected no change from May’s annual rate. That said, single-family permits fell to the lowest in 13 months.
As expected given escalating rate cut wagers, mortgage rates dropped fairly sharply in recent days. The 13bps week-to-week decline on the MBA’s gauge was the most pronounced since mid-March.
“Recent signs of cooling inflation and the increased likelihood of Fed rate cuts later this year pulled them lower,” MBA VP Joel Kan said Wednesday.
Purchase apps are still subdued, but refis picked up 15% to the highest in nearly two years. “These are likely recently-originated loans with even higher than current offered rates,” Kan remarked.
A typical US homebuyer is in a better position now versus March. In a recent update, Redfin said would-be homeowners on a $3,000 monthly budget gained $22,250 in purchasing power since rates hit 7.5% in the spring.
“House hunters who have been waiting for mortgage rates to start declining may want to get serious about buying a home soon,” Redfin’s Dana Anderson remarked, adding that the mortgage payment on a $400,000 property is $2,647 with rates at 6.85%, down around $200 since March.
So rates down, new supply and old supply up.
But, I would expect demand to surge and that will more than offset the increase in supply, so prices head much higher.
Will affordability really improve?
Well, that’s the big question, but by that logic, there’s nothing anybody can do. Keep rates where they are? Homes are unaffordable. Raise rates? Homes are unaffordable. Lower rates? Homes are unaffordable.
It seems like we’re getting into more and more of these situations these days, where you have people suggesting — in many cases tacitly and accidentally, and in other cases out of some weird fetish for defeatism — that outcomes which, in normal times, would fall under the “That’s not an option” category, are somehow acceptable.
This reminds me of a situation I got into a while back where I was trying to make a payment that had to be made, and between the Post Office, the people I was trying to pay and the person I was paying to facilitate the payment, nobody could get the payment where it needed to go, and yet everyone insisted it had to be made. Finally, I just went to the bank, pulled out $8,567, drove three hours to the relevant office, took a number, waited my turn in line, sat down in front of an actual person and put the cash on her desk with the paper bill.
Point is: If something has to be done (in this case we have to make it affordable for people to purchase shelter), it has to be done. Period. That payment had to be made. And by God, I made it. Throwing our hands up and saying “Oh well!” won’t work in the case of unaffordable housing. Because eventually, homelessness will spiral. Indeed, it already is.
I couldn’t agree with you more. I would argue that “allowing” housing to become a financial asset more than a human necessity has been one of the biggest economic and social mistakes of recent decades. But what to do now. As Nyberg of the Riksbank who once said “we also have the problem that the interest rate is a blunt weapon that affects the entire economy and cannot be aimed at an individual market. If you use a shotgun to take aim at a mosquito in a swarm you will probably also hit those around it, even if you weren’t aiming for them”.
I would love to hear some ideas from someone far smarter than I but some ideas that would seem obvious:
– Ban institutional buying of single family homes and control buying of multi-family homes much more closely.
– Change zoning laws.
Rather than banning a more incremental approach would be to take away accelerated depreciation, and imputed depreciation for residential real estate (homes). Also if long term depreciation is limited by assigning infrastructure, structural and land value to the final basis rather than zero. Also to limit deductibiilty of depreciation from other passive income. These changes would help level the playing field between investors and homeowners. As it stands these tax code mechanisms mean investors can outbid homeowners for houses.
Very interseting, thank you.
In the good old days, say prior to Monica Lewinski investigations, congress would hold hearings and demand IRS data to figure out what is unbalancing the housing markets.
Today the wealthy and Wall Street operators benefit from no substantive congressional investigations into taxation or other business matters. It is simply too easy to take a bribe and pass Lobbyist pre-written legislation. Leaves lots of time for political posturing.
Sounds like you were paying a real estate tax bill. That is hilarious because I recently went into a Starbucks to buy a “tall drip medium roast, no room for cream” and put a $5 bill on the counter. They looked at me like I was crazy and told me (as if I should have already known this) that they did not take cash- except in the tip jar. I didn’t have a credit card on me- however, luckily, the gentleman in line behind me bought me a coffee and I covered our tip!
Now that I’m retired and not looking for a home, I don’t pay much attention to RE data, but as I remember over the last 40 years or so there has really not been much change YoY in new home supply. From 1970 to today the additions to the standing stock have tended to range from 1.0 to 1.5 million units, pretty much without much attention interest rates or inflation. Considering the fact that the population has increased from 200 mil in 1970 when I graduated to 335 mil today, it seems that the new house supply level should have risen on average more than it has.
My mortgage broker friend recently said that he thinks mortgage rates will be back down to 5% in the next 12 months- at which time the housing market will open up significantly. People with mortgages at 3.5% won’t be deterred from selling if they really want to move because the financial impact of going from a 3.5% mortgage to a 5% mortgage won’t be financially catastrophic- especially for anyone wanting to downsize.