Home building activity slowing. But is that bad?

The US housing market has seen home prices go up by more than 20%. Combined with the recent increase in mortgage rates and high inflation costs, and it makes it a lot harder for people to afford a home, even if they want one.

A recently released report from the Wisconsin Realtors' Association says this is happening here as well. While the statewide average home price is only up 10% vs 20% nationwide, note the significant decline in home sales and listings compared to last year.

This situation explains the bad housing report that we saw (today).

Privately‐owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,685,000. This is 0.6 percent below the revised May rate of 1,695,000, but is 1.4 percent above the June 2021 rate of 1,661,000. Single‐family authorizations in June were at a rate of 967,000; this is 8.0 percent below the revised May figure of 1,051,000. Authorizations of units in buildings with five units or more were at a rate of 666,000 in June.

Privately‐owned housing starts in June were at a seasonally adjusted annual rate of 1,559,000. This is 2.0 percent (±9.0 percent)* below the revised May estimate of 1,591,000 and is 6.3 percent (±10.2 percent)* below the June 2021 rate of 1,664,000. Single‐family housing starts in June were at a rate of 982,000; this is 8.1 percent (±12.2 percent)* below the revised May figure of 1,068,000. The June rate for units in buildings with five units or more was 568,000.

Privately‐owned housing completions in June were at a seasonally adjusted annual rate of 1,365,000. This is 4.6 percent (±11.7 percent)* below the revised May estimate of 1,431,000, but is 4.6 percent (±13.4 percent)* above the June 2021 rate of 1,305,000. Single‐family housing completions in June were at a rate of 996,000; this is 4.1 percent (±11.1 percent)* below the revised May rate of 1,039,000. The June rate for units in buildings with five units or more was 366,000.

This comes on the heels of another report that indicated homebuilders aren’t feeling good on where things are going.

Confidence among builders in the nation’s single-family housing market fell in July to the lowest level since the start of the pandemic.

The National Association of Home Builders/Wells Fargo Housing Market Index, a survey designed to gauge market conditions, found builder sentiment dropped 12 points to 55. That marked the largest single-month drop in the survey’s 37-year history with the exception of April 2020, when the reading plummeted 42 points to 30 after the start of the Covid-19 pandemic.

Any rating above 50 on the index is still considered positive, but sentiment has now fallen 24 points since March, when mortgage rates began moving higher. The average rate on the 30-year fixed mortgage has nearly doubled since January and is now hovering just below 6%....

Of the index’s three components, builder sentiment about current sales conditions dropped 12 points to 64, while sales expectations for the next six months fell 11 points to 50 and sentiment about buyer traffic declined 11 points to 37. That last component is now solidly in negative territory.

“Affordability is the greatest challenge facing the housing market,” said Robert Dietz, NAHB’s chief economist. “Significant segments of the home buying population are priced out of the market.”

But isn’t that just a typical market correction to an overheated situation? If home prices leveled off or even dropped some, would that be such a bad thing?

Likewise, we were hearing about a record backlog of homes 3 months ago. So a decline in starts and permits might get the market back toward efficiency and equilibrium. Construction employment continues to grow (13,000 more jobs in June, and 33,000 more in May), and I also want to point out the gap between the larger number of starts and the smaller, steadier number of completions.

Would this end up being a situation where there really isn’t any difference in work and employment related to housing? Instead, a loss of future demand could wring out shortages and excessive costs, and help to cool the ongoing problems of affordability and availability.

I know much of our modern economy is based on this mentality of GROWTH, GROWTH, GROWTH, but maybe it shouldn’t be. A slowdown can be timely in an overheated industry like homebuilding, and there still will be needs for labor instead of layoffs.

As long as any home price declines are orderly and not drastic crashes that lead to people losing their homes and/or banks losing large amounts of interest income when people stop paying, I don’t see where this decline in future housing activity would cause any notable economic harm. And might make the housing market more healthy in future years.