There are a record number of housing units under construction, in part because of pandemic delays in construction (e.g., material shortages), but also because home sales have fallen sharply since the Fed’s rate hikes.
This is causing housing prices to moderate, a leading sign that inflation will also begin to decline more steeply.
Calculated Risk’s Bill McBride says that last week, the National Association of Realtors® (NAR) reported that median house prices were up just 6.6% year-over-year (YoY) in October. This is down from the peak growth rate of 25.2% YoY in May 2021.
And, Case-Shiller reported that the National Index was up 13.0% YoY in August, down from a YoY peak of 20.8% in March 2022.
This hasn’t stopped builders, who seem to be anticipating higher home sales next year. This should also moderate housing prices that have been rising in double digits until recently.
Privately‐owned housing starts in October were at a seasonally adjusted annual rate of 1,425,000, according to the Census Bureau. This is 4.2 percent below the revised September estimate of 1,488,000 and is 8.8 percent below the October 2021 rate of 1,563,000. Single‐family housing starts in October were at a rate of 855,000; this is 6.1 percent below the revised September figure of 911,000. The October rate for units in buildings with five units or more was 556,000.
Apartment construction is out distancing single-family construction because so many cannot afford to purchase in this interest rate environment. The 30-year conforming fixed rate is still hovering around 6 percent and the 5-year fixed rate ARM at 5.5 percent making it slightly more affordable.
Existing-home sales faded for the ninth month in a row to a seasonally adjusted annual rate of 4.43 million, according to the NAR. Sales fell 5.9% from September and 28.4% from one year ago. Prices are moderating, with the median existing-home sales price up to $379,100, an increase of just 6.6% from the previous year, vs. double digits raises in the past year.
Another reason for the high construction inventory is that the inventory of unsold existing homes is still low historically. It slipped for the third consecutive month to 1.22 million at the end of October, or the equivalent of 3.3 months' supply at the current monthly sales pace, when it is 4-6 months during normal times.
"Inventory levels are still tight, which is why some homes for sale are still receiving multiple offers," Yun added. "In October, 24% of homes received over the asking price. Conversely, homes sitting on the market for more than 120 days saw prices reduced by an average of 15.8%."
Much also will depend on the Fed’s actions. It’s a tossup just where interest rates will be next year. The Fed’s latest minutes telegraphed smaller rate hikes looming as inflation subsides and Nobelist Paul Krugman has been saying that he doesn’t see interest rates remaining high over the longer term as producers continue to ramp up production to meet the supply shortages.
Neither do home builders, apparently. There is still a tremendous pent-up demand for housing, whether it’s rentals or owner-occupied, as builders are also playing catchup from the supply shortages caused by the busted housing bubble.
This should make any recession caused by the Fed’s rate hikes short and mild.
Harlan Green © 2021
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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