New Home Construction Demand 'Quickly' Dries Up

[Michael Auguste]

New housing starts unexpectedly plunged more than economists projected in June as home builders grappled with the effects of rising interest rates curbing demand for new homes, according to data released Tuesday, adding to signs of an abrupt turnaround in the booming housing market.

KEY FACTS

The number of housing starts, or ​​new houses on which construction has started, fell 2% to about 1.56 million last month despite average economic projections calling for an increase of 1.4%, the Census Bureau reported Tuesday.

Building permits were slightly above expectations, coming in at less than 1.7 million, but fell from May and are down from about 1.8 million in April.

In emailed comments after the release, LPL Financial chief economist Jeffrey Roach said housing starts declined because demand is “quickly drying up” from higher borrowing costs as the Federal Reserve raises interest rates, though he expects home building activity should hold up despite the grim outlook.

Pantheon Macro chief economist Ian Shepherdson was less optimistic, pointing out single-family starts and permits both fell by 8% in their fourth consecutive month of declines and noting construction activity lags sales, which in turn lag mortgage applications.

Mortgage applications have collapsed more than 25% this year, he adds, suggesting single-family housing construction "needs to fall by [another] 20% or so over the next few months” to be more in line with demand.

The latest data comes one day after the National Association of Home Builders reported the second-worst single-month drop in home builder confidence on record, driven by ongoing production bottlenecks and high inflation that have pushed the cost beyond its market value in some cases.

KEY BACKGROUND

Historically high savings rates and government stimulus measures helped ignite a home buying frenzy during the pandemic, but signs of a slowdown have quickly emerged as the Fed embarks on its most aggressive interest rate hiking cycle in two decades to curb high inflation. Mortgage originations jumped from $2.3 trillion in 2019 to more than $4 trillion in 2020 and 2021, but demand has since nosedived to the lowest level in more than two decades. On Friday, real estate brokerage Redfin reported the number of homes for sale nationwide saw its first annual increase since July 2019 last month.

CRUCIAL QUOTE

“Home builders need to adjust rapidly to a world with fewer buyers and much more competition from private sellers of existing homes, whose listings jumped by a third in the three months to May—with much more coming,” says Shepherdson. “In short, housing construction is nowhere near the bottom.”

WHAT TO WATCH FOR

There's still a slate of housing data set to be released over the next week. On Wednesday, the National Association of Realtors publishes monthly data on existing home sales, and next Tuesday, S&P releases data on home prices.

Credit: https://www.forbes.com/sites/j...

[Taylor L.]

Increasing rates and falling home starts is going to keep putting upward pressure on rents in most markets. Housing supply will remain constrained, and becoming a new homeowner is only becoming more and more expensive. 

[Mike Dymski]

There is a thesis on the forums that current interest rates are still low relative to historic levels.  It does not account for the other side of the total cost equation...housing prices.  Inflation adjusted housing prices stayed flat for 40 years...and then more than doubled in the last ten years.  Rising rates matter more with that fact pattern than in the past.

[Bruce Woodruff]

Quote from @Mike Dymski:

There is a thesis on the forums that current interest rates are still low relative to historic levels.  It does not account for the other side of the total cost equation...housing prices.  Inflation adjusted housing prices stayed flat for 40 years...and then more than doubled in the last ten years.  Rising rates matter more with that fact pattern than in the past.

I am one of the proponents of the 'interest rates are still pretty low' thing...which is true. But of course if you factor in the insane pricing levels it sure does make a difference...... :-)

It is going to be interesting to see what happens, and in a way we are entering uncharted waters...

[Eric Bilderback]

Builders will move inventory and accept lower then accepted profits to get them off their balance sheet.  Then it’s time to start the layoffs. Inventory/supply will be very constrained and if we have layoffs then prices could remain rather high.  

Seems like it might be a good time for America to drill its own oil and gas, but I digress!

[Miranda Oswald]

The builders will take the write off of their land in order to be able to make a profit again.  But the next few months will be interesting to watch.  They have contracts out approximately 18 months in Florida.  The contracts that are now 18 months old are getting ready to close.  Right now, appraisals are the friend of the developers and builders.  The sales they are losing are due to changes in interest rates and buyers not being able to afford interest rates that are 3% higher than when they started the build process.  BUT....with inventory building, prices will soften.   The builders will fight hard to protect their appraisals.  But even when the appraisals start to fall, the builders will be able to keep the deposits of buyers unable to make up the spread between appraisal and purchase price.  Between writing down their land and keeping deposits on all the promised homes, they have insulated themselves quite a bit. What is interesting is that by creating surplus inventory they could force the resale market to suffer while they rake in their deposits.  I wonder how many people understood or even read their contracts.  

[Bruce Woodruff]

Quote from @Eric Bilderback:

Seems like it might be a good time for America to drill its own oil and gas, but I digress!

 Yeah, why would we want to be energy independent again?

[Eric Bilderback]

Quote from @Bruce Woodruff:

Quote from @Eric Bilderback:

Seems like it might be a good time for America to drill its own oil and gas, but I digress!

 Yeah, why would we want to be energy independent again?

Whatever it is must be a good one because there is a ton of collateral damage being created.