June 20, 2024

Housing starts fell 5.5% in May to 1,277 thousand after rising 4.1% in April.   While starts have been very volatile in recent months it is also clear that they have been slowing down.

In addition, builder confidence has declined in the past recent months.  With mortgage rates hovering around the 7.0% mark fewer potential buyers are walking through model homes.,  As the same time builders are dealing with an extreme shortage of available lots and local red tape is retarding builders willingness to boost their output of new homes and apartments.

Housing affordability depends on three factors — mortgage rates, home prices, and consumer income.  Mortgage rates should  decline slightly from 6.9% currently to 6.6% by yearend..  Home prices may remain at roughly their current level as the shortage of available housing puts upward pressure on prices..  At the same time, consumer income will continue to climb as jobs are created and hourly earnings continue to climb.  As a result, housing affordability should increase somewhat as the year progresses..  A median-income family today has  5% less income than is required to purchase a median-priced home.  We believe that by the end of this year that same median-income earning family will have 5% more income than is required to purchase a median-priced home.

Potential home buyers today cannot find an adequate supply of existing homes to purchase.  In fact, the supply of existing homes on the market today is near a record lower level.  Realtors cannot sell what is not on the market.  The problem is that the current owners are unwilling to trade a 3.0-3.5% mortgage rate for a 6.9% one.  Given the shortage of supply these buyers are turning to their friendly builder and seeking out new homes which are more readily available.  At the same time most builders are offering incentives to entice potential buyers.

New home sales have been edging their way upwards while existing home sales have been essentially unchanged. As mortgage rates decline somewhat further, some current homeowners may finally choose to put their home on the market and existing home sales should climb slightly between now and yearend.

Building permits fell 3.8% in May to 1,386 thousand after having fallen 3.0% in April.   Permits are clearly softening.  That means that starts should be at about that same level.  It is difficult for builders to find an adequate number of workers and available lots at affordable prices.  This will curtail the number of houses that builders are able to start.  In our opinion, the housing sector has hit bottom and will increase slowly in the months ahead.

We currently expect roughly 2.8% GDP growth in the second quarter of this year as businesses continue to create jobs and wages rise.  We expect 2.0% GDP growth in the second half of the year as consumer spending slows and the housing sector remains sluggish.

Stephen Slifer

NumberNomics

Charleston, S.C.