Housing Begins to Slow as Financial Conditions Tighten
In the bi-weekly e-newsletter Eye on the Economy, the NAHB Economics Group recently provided the following overview of the housing industry.
Rising inflation and higher mortgage rates are slowing traffic of prospective home buyers and putting a damper on builder sentiment. In June, the NAHB/Wells Fargo Housing Market (HMI) fell two more points to a level of 67 — the lowest HMI reading since June 2020. Six consecutive monthly declines for the HMI is a clear sign of a slowing housing market amidst a high-inflation, slow-growth economic environment.
As inflation is running at a 40-year high, economic policy needs to focus on improving the supply side of the economy by bringing down material, energy and transportation costs. Largely because of these supply-chain challenges, single-family starts decreased 9.2% in May to an annual rate of 1.55 million. Single-family permits decreased as well, dropping 5.5% and bringing the annual rate down to 1.05 million — its lowest pace since July 2020. Further declines are expected in the months ahead, which itself is a recession warning for the coming quarters.
Total existing home sales in May — including single-family homes, townhomes, condominiums and co-ops — fell 3.4% to a seasonally adjusted annual rate of 5.41 million. On a year-over-year basis, sales were 8.6% lower than a year ago. However, after posting four consecutive monthly declines on rising mortgage rates and worsening affordability conditions, new home sales posted a solid gain in May as some buyers rushed into the market in advance of the Federal Reserve’s June interest rate hike. New home sales surged 10.7% to a 696,000 seasonally adjusted annual rate, although year-to-date sales are 10.6% lower compared to a year ago.
New single-family home inventory remained elevated at a 7.7-month supply, up 42.6% over last year, with 444,000 available for sale. However, only 8.3% of new home inventory is completed and ready to occupy. The median sales price dipped to $449,000 in May, but is up 15% compared to a year ago, primarily because of higher construction and development costs, including materials.
We foresee a modest economic recession in mid-2023 given tightening financial conditions and increased economic uncertainty. Higher interest rates will undoubtedly slow housing and business investment, acting as a drag on economic growth. The unemployment rate is therefore expected to rise from near cycle lows to above 5% in 2023, while broader-based inflation will ease further as the economy slows.
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