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The real estate market is full of surprises. Sentiment among homebuilders has improved, inventories are rising and new home sales are at the highest levels since early 2022. And all this in the face of persistently high mortgage rates.
Homebuilders are benefiting from an unusual combination of factors: Homeowners, tied to historically cheap credit, have been reluctant sellers, crowding out resale inventory and urging buyers to new builds. This rapid rebound of the past six months will add to the surprising strength we are seeing in the economy as renewed construction activity begins to feed into the gross domestic product data.
Residential investment in the second half of the year is likely to boost US economic growth for the first time since 2021. That means worries about a long-awaited recession can be pushed back to next year.
One way to think about this new surge in activity is to see how it performed on the way down. Housing construction detracted from real GDP growth by around 1% on average between the second and fourth quarters of 2022, but leading indicators of weakness emerged earlier. The iShares US Home Construction ETF fell about 28% in the first quarter of last year. The National Association of Home Builders’ monthly sentiment survey, which tracks future sales, fell from 85 to 70 over the period — still above 50, suggesting expansion but a sign that storm clouds are gathering.
And while new home sales continued, the main thing was a deterioration in the composition of the data. Sales of new homes that have not yet started fell to their lowest level in almost two years in March 2022. The shrinking pipeline for future construction was a sign that there would be less demand for things like labor and building materials in the future, marking the beginning of a construction cycle.
The new home sales report released on Tuesday showed just how long ago that seemed in this rapidly changing real estate market. The total jumped, particularly sharply for homes where construction has not yet started, which posted one of the largest monthly increases on record.
Because of the way the recovery has unfolded, this improvement has not yet been reflected in the GDP data. Last year, builders were busy selling off existing stock before embarking on new projects. The number of housing starts in single-family housing, which had been declining last spring, had not shown much improvement until April this year.
There are now signs of change. New single-family home construction jumped in May to its highest level in almost a year. Homebuilder KB Home said in an earnings conference last week that it expects to “relaunch” new projects in the third quarter. All of this activity will lead to renewed demand for labor and building materials, which fell so significantly in the second quarter of 2022.
Housing will turn from a headwind to a tailwind in terms of GDP. That matters when thinking about recession risks.
In the last 40 years, there have been 12 quarters in which real GDP growth contracted by at least 1% on a seasonally adjusted annual basis. In nine cases, residential investment hampered GDP growth. In addition, the first quarter of 2020 was marked by a standstill in the economy affected by the pandemic. In short, it is very difficult to trigger a recession when the real estate sector, given its importance in the business cycle, is fueling economic growth, unless another important part of the economy collapses. And while we shouldn’t be giving the economy our all, it’s clear that later this year the Federal Reserve intends to raise interest rates to curb price pressures. Housing construction cycles last longer than just a month or two. Even if demand for housing later softens, the current recovery in the construction sector should fuel GDP growth for at least a couple of quarters and probably longer.
That means the heightened risk of a recession, which forecasters have been predicting since the start of this rate-hike cycle in early 2022, has most likely once again been eclipsed. Wall Street’s initial reaction was to cheer the news — over the past few weeks, tech stocks, homebuilder stocks and economically sensitive stocks such as those in the travel sector have rallied on signs of robust economic growth. But that also puts more aggressive monetary tightening by the Fed back on the table. As long as the central bank fights inflation, the guessing game about the next recession will continue.
More from the Bloomberg Opinion:
• A 30-year mortgage could save the US housing market: Allison Schrager
• The ultimate golden handcuffs are cheaper housing: Erin Lowry
• The housing market is tilting in favor of renters: Conor Sen
This column does not necessarily reflect the opinion of the editors or of Bloomberg LP and its owners.
Conor Sen is a columnist for Bloomberg Opinion. He is the founder of Peachtree Creek Investments.
For more stories like this, visit Bloomberg.com/opinion
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