Home Finance How Fragile Is the US Housing Market Right Now?

How Fragile Is the US Housing Market Right Now?

by internationalbanker

By Cary Springfield, International Banker


The cycle of aggressive interest-rate hikes implemented by the Federal Reserve (the Fed) beginning in early 2022 has profoundly impacted the US economy, unleashing a major downturn and sharply raising the prospects of an impending recession. Among the markets most acutely impacted by this monetary tightening is US residential housing, which saw monthly prices decline in late 2022 at a scale unseen in more than a decade as demand for homes waned in the face of sharply rising mortgage costs. But with the Fed easing off on its rate hikes, even leaving its federal funds rate unchanged in June at 5-5.25 percent, and with home prices and housing starts defiantly on the rise once more, there is growing evidence that the housing market has successfully turned a corner.

Concerns over potential US housing-market weakness surfaced during the final quarter of 2022, a three-month period in which the average rate on a 30-year fixed mortgage eclipsed 7 percent for the first time in more than 20 years and stymied housing demand from both consumers and investors. Indeed, data from Redfin found that during the first quarter of 2023, investors purchased 48.6 percent fewer homes than they had a year earlier, the largest decline on record (dating back to early 2000), with the Seattle-based real-estate firm citing those elevated interest rates as the key reason for the drop alongside declining rents and housing values. “Investors have gravitated toward more affordable properties due to still-high housing costs and rising mortgage rates, which has left first-time homebuyers with fewer starter homes to choose from,” Redfin’s senior economist, Sheharyar Bokhari, said of the figures.

Indeed, the housing supply remains tight, partly due to homeowners’ hesitancy to sell and lose their cheap mortgages, havingdecided to refinance them at rock-bottom interest rates during the COVID-19 pandemic. “The most surprising thing about this housing market is how the increase in interest rates has affected supply and demand pretty equally,” Daryl Fairweather, chief economist at Redfin, told the New York Times, adding that while the pullback in demand was probably more intense, the house-construction sector is benefiting from a “dire lack of supply”.

Nonetheless, several data releases in recent weeks show that the US housing market remains buoyant and may have started to recover again in line with the Fed beginning to cool its rate-hike regime. According to June 27 data from the S&P CoreLogic Case-Shiller Home Price Indices, house prices across the country rose by an average of 1.3 percent in April, meaning that price appreciation was observed for three consecutive months after falling for seven straight months. The 10- and 20-city composite indices, which measure changes in residential house prices in 10 and 20 metropolitan regions of the United States, respectively, both gained 1.7 percent month-over-month.

“The U.S. housing market continued to strengthen in April 2023. Home prices peaked in June 2022, declined until January 2023, and then began to recover. The national composite rose by 1.3 percent in April, repeating March’s performance, and now stands only 2.4 percent below its June 2022 peak,” said Craig J. Lazzara, managing director at S&P Dow Jones Indices. “The ongoing recovery in home prices is broadly based. Before seasonal adjustments, prices rose in all 20 cities in April, as they had also done in March. Seasonally adjusted data showed rising prices in 19 cities in April, versus 14 in March.”

Recent U.S. Department of Commerce figures showing the sales of new US single-family homes in May climbing to their highest level in nearly 18 months were also positive news for homebuyers. New-home sales surged month-on-month by 12.2 percent to a seasonally adjusted 763,000 in May, the highest level since February 2022 and 20 percent higher than May 2022. And housing starts performed well in May, rising to a seasonally adjusted annual rate of 1.631 million units from April’s downwardly revised 1.34 million. May’s figure was the highest since April 2022, which, in turn, was the highest since 2006, while the 291,000-unit monthly rise in starts was the most since January 1990. The 21.7-percent rise for May, moreover, was the largest percentage gain since October 2016. “While housing starts data tend to be volatile, and this figure may be revised down in coming months, the enormity of the increase suggests that builders are broadly expanding operations this summer,” Nationwide Economics’ senior economist, Ben Ayers, noted in response to the figures.

Much of this data, therefore, underscores that house construction is recovering once more, capitalising on stronger demand this year and the dearth of existing housing inventory. Indeed, builder confidence in the market for newly built single-family homes rose five points to 55 in June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on June 19. This marks the sixth straight month that builder confidence has increased and is the first time that sentiment levels have surpassed the midpoint of 50—indicating positive territory—since July 2022. According to Kathy Bostjancic, chief economist for Nationwide Mutual, when she recently spoke with the New York Times, the new housing construction “tells us something about where the economy is headed, so this suggests that things are potentially picking up”.

Not everyone is convinced that this upswing is sustainable over the long term, however. “The strength is so far off trend that it calls sustainability into question,” Jefferies’ US economist, Thomas Simons, recently wrote, citing evidence from the Midwest, where the 66-percent jump in starts was arguably more attributable to the reconstruction efforts being made following the destructive spring tornado season in the region than to any dynamic expansion in market sentiment.

It should also be noted that house prices are still marginally below where they were 12 months ago. According to Redfin’s figures released on June 29, the typical US home sold for roughly $383,000, around $4,000 less than the all-time high set in June 2022. With prices improving recently, this year-on-year discount is the smallest in four months. And new listings in the four weeks to June 25 fell by a mighty 27 percent year-on-year, marking the biggest drop since the start of the pandemic. This has helped to trigger an 11-percent decline in the total number of homes for sale, the first double-digit drop in more than a year, Redfin also noted.

“Inventory is falling because of high mortgage rates, with many homeowners staying put to hang onto their comparatively low rates. Although the average 30-year mortgage rate has inched down in recent weeks, it’s still near 7%, more than double 2021’s record-low levels,” Redfin added. “High rates are also deterring homebuyers, but they still outnumber home sellers. Pending home sales are down 15%, significantly smaller than the drop in new listings. That means buyers are snapping up inventory faster than it’s being listed, which is keeping home prices elevated.”

As such, further house-price appreciation can be expected during the year’s second half. And although rental costs rather than purchased-home prices are featured in the calculation of US inflation, the return to upward price momentum is nonetheless a solid indicator of consumer confidence, especially if these positive trends hold throughout the rest of the year, which may provide the Fed with another headache at a time when it is trying to rein in inflation.

The interest-rate path ultimately pursued by the Fed could prove pivotal in determining the housing market’s prospects. Should inflation continue to ease, additional rate hikes may be off the table, in which case US housing will likely experience further rejuvenation. But should consumer-price growth persist above target rates, the Fed will not hesitate to enact further monetary tightening, which could see house prices and demand from buyers remain depressed for the remainder of the year.

“The market isn’t nearly as fast as it was 18 months ago, when homes were flying off the market for well over asking price, and it’s not as slow as it was six or seven months ago, when mortgage rates first shot up,” Redfin’s premier agent, Andrea Chopp, recently noted. “Buyers should keep in mind that desirable homes are getting multiple offers and selling above asking price. And sellers should know that their home may not attract as much competition as their neighbor’s home did two years ago, but it will sell if they price it fairly and put effort into marketing. Things like making small repairs and staging are important again.”


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