We have been hearing a lot about the urgent need for millions of new homes in the lead-up to the election, so it must come as a shock to many to see today’s report on housing starts and permits at recession levels.
Minneapolis Fed President Neel Kashkari recently stated that housing demand is high, so the clearance rate (mortgage rates) should also be higher. Considering this claim comes from a Fed president, it’s essential to closely examine the data as they should have access to the same housing data we are all looking at.
It’s worth noting that existing home sales are at their lowest levels in three years when adjusted for workforce size. Despite this, housing starts and permits are currently at levels reminiscent of the early COVID-19 recession. Normally, high demand should lead to an increase in housing starts and permits, but we are currently seeing levels akin to a recession.
Housing starts and permits have been on a downward trend for a while now, indicating that builders are reducing mortgage rates to stimulate sales. Kashkari’s comments on clearance rates suggest a lack of understanding of the market dynamics.
Today’s housing starts report continues the trend we have observed, with builders showing more enthusiasm when mortgage rates approach 6%. However, they tend to slow down when rates are between 6.75% and 7.5%. This trend is particularly evident in single-family permits, while 5-unit permits are already at recession levels.
From Census:
Housing Starts: Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,311,000, 3.1% below the revised September estimate.
Building Permits: Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,416,000, 0.6% below the revised September rate.
The accompanying charts provide a clear visualization of the current housing trends, indicating that the ambitious goal of building millions of new homes may not be realized. The market dynamics suggest that new home sales are still below levels seen during past economic recessions.
While builder confidence improves with lower mortgage rates, the recent increase in rates hampers growth. Builders could attract more buyers by offering lower rates, but sustaining these rates for a longer period is crucial for significant growth in housing starts.
A lower Fed funds rate could facilitate land purchases and apartment construction, but the impact may take time to materialize. If the current trend persists, rent inflation could rise due to the inadequate supply of new homes.
The key insight from today’s housing data is that the demand does not justify additional construction from the builders’ perspective. Without a significant drop in mortgage rates and prolonged low rates, the construction industry may continue to show apathy towards new projects, leaving millions of homes unbuilt.
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