NAHB Chief Economist: 'The Housing Market is Diverging'

In his biweekly newsletter Eye on the Economy, NAHB Chief Economist Robert Dietz provided the following overview of the housing industry:

As the Federal Reserve digests the latest inflation and labor market data, the housing market is diverging. Single-family construction is moving off cycle lows, while multifamily development is slowing after an unexpectedly strong run.

Interest rates moved sharply higher at the start of July and then pulled back as the bond market attempted to predict the final actions by the Federal Reserve for this tightening cycle. From the end of June until the first week of July, the 10-year Treasury rate increased from 3.7% to almost 4.1%. This lifted the average 30-year fixed-rate mortgage to almost 7%, per the Freddie Mac weekly survey. These higher rates were because of hawkish commentary from Fed officials indicating multiple, additional federal funds rate hikes were set for the coming months.

But it’s the inflation data that matter: The June Consumer Price Index data brought good news, with consumer inflation moving down to a 3% year-over-year growth rate. Moreover, the internals indicate additional declines lay ahead, as the Fed attempts to bring inflation closer to 2%. Shelter inflation (rent and home owners’ imputed rent) accounted for a striking 70% of the inflation gain in June

However, shelter inflation growth will decline in the months ahead as an above-trend level of apartments under construction are completed. Moreover, the Producer Price Index business inflation measure for May indicate only a 1.1% year-over-year gain, with residential construction material pricing up only 0.5% on a year-to-date basis in 2023.

Taken together, the recent inflation data show slowing price growth, with more ahead. Consequently, the bond market repriced interest rates in mid-July, with the 10-year Treasury rate returning to below 3.8%. NAHB’s outlook is that this is consistent with a Fed rate increase in July and a 50-50 chance of a final increase in September. According to this forecast, mortgage rates reached their peak last fall.

The NAHB/Wells Fargo Housing Market Index (HMI) continued to reflect growing but cautious optimism among builders. Low existing inventory, which is bolstering demand for new homes, helped push builder confidence up in July to a level of 56. Sentiment has continued to improve even as the industry grapples with rising mortgage rates, elevated construction costs and limited lot availability. This was the HMI’s highest reading since June 2022.

Mirroring this improvement, single-family permits increased 2.2% to an annual rate of 922,000. Although down 2.7% compared to a year ago, this was the best reading in a year. Meanwhile, single-family starts are down more than 7% compared to a year ago.

In contrast, multifamily permits decreased 12.8% to an annualized 518,000 pace, down 31.2% compared to June 2022. The June pace for multifamily permits is at its lowest level since late 2020. It appears the widely expected slowdown for multifamily construction has begun.

But in the meantime, multifamily completions will remain elevated. There are 994,000 apartments under construction, the highest number since 1973. And multifamily completions are up more than 25% compared to a year ago — a good sign for the shelter inflation reading that will help determine monetary policy in the months ahead.

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