This morning’s housing stats were, at first glance, not very good. The headline housing starts number showed a decline of close to ten percent from last month’s number, versus a consensus expectation for a drop of closer to three percent. There was a little relief from the building permits number that was a little higher than expected, but even so, it appears that the house building boom is well and truly over. But does that mean that house prices are about to take a nosedive?
Not necessarily.
This morning’s numbers may have been officially worse than expected, but they weren’t really a surprise in the logical sense. The Fed announced two consecutive three-quarter point rate hikes and say there is more to come, and mortgage rates are significantly higher than the ultra-low levels that fueled the boom as a result. That makes every house more expensive for anyone who isn’t just ponying up cash, and that isn’t the only thing discouraging potential buyers.
There is also the fact that for the last six months, TV pundits have been talking about a coming recession. For most homebuyers and consumers, that word brings back memories of 2008, a time when unemployment spiked and housing prices collapsed, leaving a lot of people in a lot of trouble. They look at the big jump in housing prices over the last couple of years, hear heated discussions about whether we are headed for a recession or are already in one, and have a perfectly understandable reluctance to buy, fearing that they may be hitting the top of the market.
That logic is being used by pundits everywhere to explain a bad number and, by extension, to predict a collapse in house prices before too long. There is, however, one obvious problem with that view: Even as rates have risen and talk of recession has become commonplace, actual housing prices have, despite jumping so dramatically, not yet turned tail. The average rate of increase across the country has flattened out over the last couple of months, but prices remain elevated, as does demand for housing.
The big rise in prices over the last two years has been as much about undersupply as it has been about a post-covid demand surge. Combined labor and commodity shortages have frustrated attempts by homebuilders to ramp up output after cutting back to virtually nothing in the spring of 2020, and those problems haven’t yet gone away. In that context, a bigger than expected fall in housing starts could possibly be about a large number of unfinished projects due to labor and material shortages, and a sign that meeting demand is still an issue. That would be something that helps prop up prices, even with the obvious interest rate headwinds, not a warning of an impending collapse.
Builders, it seems, are less inclined now to build on spec and are waiting for confirmed orders. If that is true, it means only that they are reflecting the leveling off of prices, not that demand has collapsed. True, homebuilders’ sentiment is down below 50 versus a high of around 90 at the end of last year, indicating a negative outlook for the market, but that is inevitable given all the known problems. Homebuilders are human beings, and as such, will have seen the rate hikes and heard the gloomy economic forecasts. If those forecasts prove to be true, prices will collapse, but they aren’t true yet, and there is now a growing feeling that they won’t be in the near future.
The biggest danger to house prices is that when conventional wisdom comes from a strong consensus, it can become a self-fulfilling prophecy. If enough pundits scream loudly enough that a collapse is coming, potential buyers will be discouraged, and prices will indeed fall. It may be that the days of every house that hits the market being subject to a crazy bidding war are gone, but there is evidence that there is still a housing shortage. So, unless a full-blown recession with accompanying high unemployment is coming, housing prices probably won’t collapse any time soon.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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