April 16, 2024

Housing starts plunged by 14.7% in March to 1,321 thousand after having risen 12.7% in February after having dropped by 12.2% in January.   Clearly, starts have been very volatile in recent months as cold and snowy weather has affected the outcome in every month.  We expect starts to climb gradually throughout 2024 as the Fed eases beginning around midyear and as the inflation rate continues to subside.

Furthermore, builder confidence has climbed in the past several months given the drop in mortgage rates.  If builders are more confident it is a sure bet that housing starts will continue to climb slowly.

Housing affordability depends on three factors — mortgage rates, home prices, and consumer income.  Mortgage rates should  decline slightly from 6.8% currently to 6.25% by yearend..  Home prices may decline slightly as builders crank up the pace of production and more supply becomes available.  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 sharply as the year progresses..  A median-income family today has about 5% more 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 25% 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 6.8% 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 homes continue to shrink — until recently.  As mortgage rates decline somewhat further, some current homeowners may finally choose to put their home on the market and existing home sales should rebound.

Building permits fell 4.3% in March to 1,458 thousand after having risen 2.3% in February  Permits appear to be inching their way higher.  If that is the case, starts should follow.  However, 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 continue to increase slowly in the months ahead.

We currently expect roughly 2.5% GDP growth in the first and second quarters of this year as businesses continue to create jobs and wages rise.

Stephen Slifer

NumberNomics

Charleston, S.C.