Sunday, June 19, 2022

Housing starts crash! But more houses are now available, and might become more affordable

For the "recession is coming" crowd, Thursday's report on new housing starts in the US was a big piece of evidence for their case.
Privately‐owned housing starts in May were at a seasonally adjusted annual rate of 1,549,000. This is 14.4 percent (±8.9 percent) below the revised April estimate of 1,810,000 and is 3.5 percent (±10.7 percent)* below the May 2021 rate of 1,605,000. Single‐family housing starts in May were at a rate of 1,051,000; this is 9.2 percent (±11.0 percent)* below the revised April figure of 1,157,000. The May rate for units in buildings with five units or more was 469,000.

Yes, April was revised higher to the most (seasonally adjusted) housing starts in 16 years, but 1,549,000 is still the lowest amount of starts in 13 months, and it may make some people wonder if an already-frothy housing market might be boiling over into a 2006-style decline.

On the flip side, the higher amount of housing starts from prior months are becoming homes that are ready to be moved into.
Privately‐owned housing completions in May were at a seasonally adjusted annual rate of 1,465,000. This is 9.1percent (±22.6 percent)* above the revised April estimate of 1,343,000 and is 9.3 percent (±19.0 percent)* above the May 2021 rate of 1,340,000. Single‐family housing completions in May were at a rate of 1,043,000; this is 2.8 percent (±13.6 percent)* above the revised April rate of 1,015,000. The May rate for units in buildings with five units or more was 417,000.
That's a good sign to me, as more inventory is something that many have been calling for as home prices in America increased by more than 20% year-over-year. And it also shows that home construction workers have been plenty busy, so the lack of starts shouldn't lead to layoffs in the near future and may actually result in a bit of relief to get things back towards balance.

The decline in housing starts came in a month when the Federal Reserve gave its first increase in interest rates off of the rock-bottom levels we had seen for the last 2 years. Now that the Fed has raised rates by another 75 points this month, with more likely to follow. So if you're pessimistic, you will likely have concerns about whether higher costs of borrowing are going to combine with already-inflated housing prices to slam the market like we're back in 2006 or 2007. And you know what followed 2006 and 2007....

With that situation in mind, let's look at the stats from the Wisconsin Realtors Association on our state's housing market. Wisconsin has also seen a significant runup in housing prices in recent years, with the median sale price reaching $275,000 in May 2022, which is more than $125,000 above where it was 8 years ago, and over $100,000 more than it was 5 years ago.

This graph from the WRA shows how year-over-year sales prices have risen by sizable amounts since 2017, with noticeable gaps for each of those years.

Conversely, even though there are more home sales in Wisconsin as the weather warms and the school year ends, you can see how Wisconsin's stronger sales in January and February over the last 2 years have flattened out in the months after that (2022 is the thicker black line, and 2021 is the thicker red line). That's a noticeable contrast to the 2010s, where sales took off with the weather.

Here's another way to look at how things have flattened out in March, April and May in the 2020s, by comparing how many more sales happened in those months vs the low-sale month of January. Look at how the gap between years blows up.

My question is "is this a bad thing"? Wages in Wisconsin certainly have not gone up 59% in the last 5 years like median home prices have, and now the higher rates makes those higher prices even less affordable. Some reversion should be expected as a result, and perhaps the higher inventories will also help home prices to come closer to something that more Wisconsinites can safely accept.

The question to me is how far this housing market falls, and how fast. If there's a slight, gradual decline over 12 months, that might be something that not only doesn't affect the wider economy, but actually is welcomed and turns us back toward a more affordable, balanced market. But if people aren't able to pay their mortgages or the construction industry stops quickly and sharply, then we would see a crash in prices and/or demand that becomes a much worse situation, and could shove the economy over into recession.

I think more Americans are locked into lower rates and/or cash vs the 2000s, so that makes me think any damage would be limited compared to the Great Recession. But the coming months will tell us a lot, and I have definite fears that the Fed's is going to raise too much, too fast"" in a time when our overheated housing market is already set to slow down.

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