Everyone wants a massive housing construction boom — it was even a feature of the last presidential election, from both sides. But what we have had instead is the Walking Dead on housing permits for years. While the desire for more housing is commendable, understanding the economics of housing starts is critical. I wrote about this in 2021: Why we can’t build our way out of this hot housing market.
Don’t be shocked when construction halts as rates rise. Today’s housing starts data reveals some eye-opening challenges in getting momentum in the building of more housing units. If mortgage rates stay high, it will only become more challenging for the builders. As always, the builders aren’t the March of Dimes; they’re here to make money, and it’s getting more difficult for them as their supply is rising and profit margins are falling.
Housing starts and permits still at recession levels
The housing starts report released today continues recent trends, indicating that we remain at housing permit levels similar to those observed during the COVID-19 pandemic. The current elevated mortgage rates are presenting challenges to further construction.
Additionally, while homebuilders are actively working to manage mortgage rates, we all know that if the builders couldn’t pay down mortgage rates, housing starts data would be worse today.
Builder’s confidence fading
It’s disheartening that we can’t gain any momentum with housing starts data, which is not surprising when mortgage rates rise to 7% or higher. It’s incredibly frustrating to see the United States dealing with such low permits for years. I understand how concerning this is for many Americans. The latest builder confidence data, which reflects the outlook for the next six months, has also dropped again, and it’s tough to remain optimistic when the six-month outlook continues to decline.
New home sales show some resilience
On a more optimistic note, new home sales are showing resilience compared to the downturn we experienced in 2022, though they have not yet begun to see significant growth. We tend to observe favorable trends when mortgage rates approach 6%, while we encounter challenges as rates creep toward 7% or higher. Therefore, it appears we are currently navigating a range that is closely tied to fluctuations in mortgage rates.
If new home sales went below the lows we saw in 2022, then that would be a different story; we would see more pressure on labor, as demand doesn’t warrant having this much labor when housing starts and new home sales are falling. Thankfully, the builders have been paying down rates and we have had times when mortgage rates headed toward 6% to help sales from breaking below the lows of 2022 and keep people employed.
Conclusion
When it comes to housing starts data and new home sales data, we are stuck. Progress will remain stagnant until we implement monetary policies that genuinely promote growth. For me, this situation hinges on the labor market needing to shift; without that, we will have to wait until the Federal Reserve cuts rates by 1% to make 6% mortgage rates more attainable with duration.
Neither of those crucial developments has yet occurred, bringing us to this point where the promised housing construction boom simply hasn’t materialized and will not happen anytime soon.
