Homebuilders are done until mortgage rates drop
Tuesday housing starts report clearly shows that homebuilders will do away with single-family construction until mortgage rates come down. Housing completion data is still struggling to gain traction, but in the coming months builders should be able to complete more homes while housing permits and single-family home starts are down. Had it not been for the strong rental demand that has boosted multifamily construction this year — 18% year-to-date — this line of data would have looked much worse.
Private housing starts in July were at a seasonally adjusted annual rate of 1,446,000. This is 9.6% (±8.6%) below the revised June estimate of 1,599,000 and 8, 1% (±11.9%)* below the July 2021 rate of 1,573,000. Single-family housing starts in July were 916,000; that’s 10.1% (±10.8%)* below the revised June figure of 1,019,000. The July rate for units in buildings with five or more units was 514,000.
Of course, today’s housing starts aren’t collapsing like they have since the 2005 peak, because we haven’t had a sales credit boom in recent years like we have. made from 2002 to 2005, which inflated new home sales to 1.4 million.
We are currently in a very different real estate recession from the one we experienced from 2005 to 2011. The credit cycle is very different today than it was in 2002-2005.
Why do I call this a real estate recession? A recession occurs when total activity falls to a point where production reverses and jobs are lost. For now, homebuilders will keep the labor as they need to finish the homes they have in the pipeline. However, as new home sales have fallen, future construction growth is until builders feel comfortable building more single-family homes.
As can be seen below, single-family housing starts are falling more noticeably than total housing starts, which are still driven by rental demand.
Total activity in the existing home sales market is down, which means less commission transfer in this sector. Loan originations are falling amid falling demand for refinancing and loan purchases, which means job losses in the mortgage industry. This aspect differs from the New Home Sales Selector, which drives homebuilding, construction work, and major purchases for these new homes. The recent drop in copper prices is very telling; even with a recent rebound in prices, things are slowing on the homebuilding side.
In March, I wrote that the new home sales sector was in jeopardy once the 10-year yield topped 1.94%. Currently, the 10-year yield is at 2.81%, and mortgage rates above 5% had a greater impact on this sector than on the existing home sales market.
Recently I talked about how low rates have to be to get housing back in order. In the past, builders have taken advantage of mortgage rates falling to 4% or less. Although we had more than 1%+ movement in rates, we are still above 5%. We can see that the builder’s confidence data has crashed recently, dropping below 50 for the first time in a long time, with the latest print at 49.
I raised the red flag for the fifth housing-related recession in June, knowing that the rate of construction growth was over for this cycle until mortgage rates fell again. In 2018, when mortgage rates hit 5%, builders suspended construction for 30 months; they were supply-conscious in the new home sales sector. We have 9.3 months of supply but of this number, 6.22 months supply is under construction and 2.24 months of supply hasn’t even started yet
Of course, this is a very different housing cycle as housing completion data has been extended during the COVID-19 recovery. Now that demand is dwindling, builders will take their time finishing these homes to ensure they have buyers ready to move in once the homes are complete.
From the census: Housing Completions Private housing completions in July were at a seasonally adjusted annual rate of 1,424,000. This is 1.1% (±14.8%)* above the revised June estimate of 1,409,000 and 3.5% (±15.5%)* above the July 2021 rate of 1,376,000. Single-family home completions in July were 1,009,000; this is 0.8% (±12.2%)* below the June revised rate of 1,017,000. The July rate for units in buildings with five or more units was 412,000.
During the years of the housing bubble, housing starts, permits, completions, credit and prices moved together. That’s not the case here, as housing completions are still lagging, even though things are improving on the supply side.
Over time, housing permits will decline more significantly as long as mortgage rates remain high. As homebuilder confidence recovers, building permits should drive growth. We’re not there yet, but the manufacturer’s confidence data will give us the first clues when things improve.
From the census: Building Permits Private housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,674,000. That’s 1.3% below June’s revised rate of 1,696,000, but 1.1 % above July 2021 rate of 1,655,000. Single-family clearances in July were 928,000; this is 4.3% below the revised June figure of 970,000. Housing clearances in buildings with five or more units stood at 693,000 in July.
The housing construction data seems accurate to me; the downward trend in permit activity and housing starts should stay with us for some time to come. Homebuilders don’t build for charity – they’re here to make money. In addition, they face more competitive inventory as the number of existing homes increases and these are cheaper. Thus, they will take their time to build the houses already under construction and those they have not yet started.
When mortgage rates drop, the narrative may change, but we’re not there yet. Strong rental demand is supporting multi-family construction, but weak single-family housing starts are here to stay; expect single-family housing starts to see their first decline since 2011.