September 20, 2022

Housing starts jumped 12.2% in August to 1,575 thousand after having fallen 10.9% in July.  While bouncing around from month-to-month, builders are clearly becoming more cautious.

Builders confidence has declined in the past several months as rising home prices and rapidly rising mortgage rates are making them uneasy.  While starts jumped in September, that clearly seems to be the aberration.  Their confidence level fell to 46 in September which is the lowest since May 2020.  In their report the builders noted that traffic has begun to decline sharply in the past couple of months.  As a result, it is likely that home prices should soon stabilize or even decline.

Mortgage rates have recently jumped from about the 3.0% mark at the end of last year to 6.0%, and are likely to climb to 6.5% by the end of mext year.  The further expected increase in mortgage rates is making homebuilders (and buyers) nervous and beginning to cool the red hot housing market.

As mortgage rates rise while home prices level off housing affordability is likely to decline to 100 or so by yearend which means that the median-income earning family has just enough income to qualify for the mortgage on a median-priced home.  This equation has three parts — mortgage rates which, as noted, are  likely to continue rising, home prices which should level off as more and more people find them unable to purchase, and consumer income which, given continuing job gains and rising wages should continue to climb.

What is interesting is that the drop in housing starts in the past several months has all been in single-family starts.  In the past year starts of single-family homes have fallen 14.6% while multifamily starts have risen 31.0%.  Clearly builders believe that single-family homes are going to be much more at risk in the event of an economic turndown than apartment units which are in short supply.

Building permits fell 20.0% in August to 1,517 thousand after having declined 0.6% in July..   Like starts, the decline in this series reflects warranted concern by builders regarding the future path of mortgage rates and the extent to which people will be able to afford to purchase a new home.

Builders have an increasing number of units for which permits have been issued but construction has not yet begun.  Builders have plenty of jobs in the pipeline once sales rebound..

Meanwhile, the number of new homes under construction keeps rising so there should be more homes completed in the months ahead which will reduce some of the extreme shortage of available homes for sale as 2022 progresses and curtail the upward pressure on prices.

The economy is beginning to respond to the Fed’s tightening initiative.  Both new and existing home sales have declined.  The drop in new home sales has been breathtaking but it tends to be a particularly volatile series and its current reading could overstate the drop-off.  The decline in existing home sales is less dramatic and seems more in line with other reports from realtors.

Given that housing will still be reasonably affordable for most potential home buyers, and that builders have a lot of new homes under construction which will boost supply in the months ahead, we expect housing starts to slow slightly between now and yearend to a 1,450 thousand pace.

After declining in each of the first two quarters of the year we expect GDP to climb by about 1.5% in the second half of the year.  We also anticipate 1.5% GDP growth in 2023 as real interest rates remain negative and as supply chain difficulties continue to abate.

Stephen Slifer

Charleston, SC