Traditionally, when market participants say housing is leading us into a recession, this is what they mean
Federal Reserve Interest rates have been raised too high, housing construction has slowed as a result and a recession with job losses is not too far away. But a funny thing happened to the U.S. economy this year: Single-family home permits continued to rise as new home sales increased year-over-year. How could this happen when mortgage rates rose from the lows earlier in the year?
This happened because large home builders made deals, cutting prices and paying rates to increase their market share. The more prominent home builders are flexing their financial muscle on smaller builders and attracting buyers to help sell the homes. This keeps construction workers employed and gives them money to spend on goods and services.
One of the early indicators of a recession with job losses has failed to materialize as construction employment has remained stable so far. Because we have many new homes that haven’t even begun construction yet – with 105,000 new homes, the most ever before – construction workers are still needed to complete these homes.
Today’s housing starts data beat expectations, but the story has been the same all year: The housing boom is fading while single-family housing starts performed better than anyone could have imagined, especially as mortgage rates rise rose 8%. In the table below you can see that 5 unit permits are decreasing, unlike the table above for single family permits.
Out of census:
Housing construction begins: Private housing starts were at a seasonally adjusted annual rate of 1,372,000 in October. This is 1.9 percent (±13.5 percent)* above the revised September estimate of 1,346,000, but 4.2 percent (±10.0 percent)* below the October 2022 rate of 1,432,000.
Taking into account all the factors that the housing market has had to deal with, as we can see in the chart below, housing starts have held up and we still have many single-family homes in the construction phase that need to be completed. If mortgage rates fall, this will be beneficial for builders as more reputable builders have shown the ability to reduce rates for moving products.
House builders’ confidence has been waning recently, but a big reason for this is that smaller builders are not able to recoup their rates as much as larger builders, so this market share gain is ensuring new home sales continue to grow in a higher rate environment climb.
Housing completions:In October, private housing was completed at a seasonally adjusted annual rate of 1,410,000. This is 4.6 percent (±11.6 percent)* below the revised September estimate of 1,478,000, but is 4.6 percent (±13.2 percent)* above the October 2022 rate of 1,348,000.
The number of houses completed is still one of the saddest numbers we’ve had post-COVID-19: the number of houses completed hasn’t changed in years, and I don’t think that’s going to change for the better any time soon; The builders are working on their backlog and slowly and steadily winning their race.
Building permit: The number of privately owned housing units approved through building permits in October was 1,487,000 annually, seasonally adjusted. This is 1.1 percent above the revised September rate of 1,471,000, but 4.4 percent below the October 2022 rate of 1,555,000.
The only bright spot for builders is that residential building permits here have held up as the 5-home boom collapses and permits for single-family homes have increased. This, along with the backlog of new homes under construction or not yet started, has kept Americans employed and working. As shown in the chart below, approvals have stabilized and are slowly increasing.
The market share battles between big builders and everyone else have helped the economy through new single-family home construction and permitting. Not all construction companies have excess profit margins to drive prices down. If overall mortgage interest rates fall, construction can continue. However, with mortgage rates having reached 8% – very restrictive to construction growth – developers have found a way to keep things going; They just throw more money into it.
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