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Written by: Brian Gilbert | Advisor Asset Management
Housing data can be a useful barometer for where the general economy might be headed as the combined contribution to GDP generally averages 15–18% through residential investment and consumption spending on housing services. The residential contribution to the Fixed Investment component of GDP in Q2 (2nd quarter) was negative for the first time since Q1 2023 at -0.11%. Even though the Q2 print for GDP was 3.0% and the Atlanta Fed currently estimates Q3 GDP at 3.4%, we believe we should keep an eye on the trends as challenges in housing remain.
Affordability
The most effective way to tackle the nation’s housing affordability crisis is to increase the housing supply. One of the primary challenges to housing affordability seems to be that current 30-year fixed mortgages rates are preventing homeowners from wanting to relocate. In July 2020 the average 30-year fixed rate loan was below 3% and remained below 3% until September 2021. The latest estimates from Realtor.com suggest that over half of existing mortgages are below 4% and nearly three quarters are below 5%. With home prices moving steadily higher, homeowners are reluctant to sell their existing home and move. This reduces the number of homes for sale and the lack of inventory continues to push prices higher.
Source: National Association of Realtors
Where do mortgage rates need to fall to free up additional inventory? A Realtor.com study earlier this year estimated that 40% of potential buyers may consider a change if rates drop below 6%. The question remains, “Will they drop that much and for how long?” During the week of September 20, the average 30-year fixed rate mortgage reached 6.13%, the lowest in two years, and mortgage applications rose 11% with refinancings rising to 55.7% of those loans which was the highest level since April 2022. As expected, this remains well below the pre-pandemic average with so many mortgages below 3%. The Mortgage Bankers Association (MBA) reports the last time refinancing activity was this high, mortgage rates were under 5%. While this number can be very volatile, the October 23 release revealed the 30-year average fixed mortgage rate was 6.52%, and moving higher, and applications for purchases and refinancing dropped to the lowest levels since August. Consistently higher mortgage rates appear to be unable to provide the impetus that potential buyers need to get into the market — yet another sign housing will continue to struggle.
Builder Confidence – National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)
The NAHB is one of the largest trade associations in the United States. Founded in 1942, the NAHB members build approximately 80% of new homes constructed in the U.S. HMI measures homebuilders’ confidence and has remained below the long-term average of 52 for the past 15 months and posted only two readings above that level since July 2022.
Source: National Association of Home Builders
As discussed above, many potential home buyers remain on the sideline waiting for lower interest rates. While housing affordability remains critically low as home prices and mortgage rates continue to move higher, builders are feeling more optimistic about 2025 market conditions. Builder confidence in the market for new single-family homes was 43 in October, up from 41 in September. To entice buyers while mortgage rates remain high, builders have been cutting prices, buying down mortgage rates and including sales incentives.
Source: National Association of Home Builders
Housing Starts and Permits
Housing starts were in line with consensus estimates in September as single-family home starts improved modestly while multi-family home starts remained weak. Overall housing starts decreased 0.5% in September to a seasonally adjusted annual rate of 1.35 million units.
With the Federal Reserve easing monetary policy and builder sentiment improving slightly, single-family starts posted a gain of 2.7% in September while multifamily construction continued to weaken. On a year-to-date basis, single-family construction is up 10.1% while multifamily decreased 9.4% to the weakest pace since May.
Single-family permits were up in all four regions year-to-date and up 11.5% YoY (year over year) with the largest increase in the West at 16.2%. Forty-seven states have posted an increase in single-family permits over the past year. Multifamily permits are a different story with three of the four regions positing declines. The levels of starts and permits reflect buyers concern about affordability conditions and although single-family numbers are improving, albeit from a lower level, multi-family numbers remain weak.
Source: National Association of Home Builders
Existing Home Sales
Existing home sales didn’t improve in September despite the drop in mortgage rates. The National Association of Realtors (NAR) reported U.S. sales of previously owned homes declined to a 14-year low in September. It appears potential buyers are waiting for a further decline in mortgage rates, which may not be coming, as mortgage rates have climbed from their recent two-year low of 6.13% back to nearly 7.0%. Contract closings were down 1% MoM (month over month) and 3.5% YoY as the median sales price in September rose 3% from last year to $404,500. Halfway through October, applications have remained weak and indicates we may have another negative print next month. The good news may be that 1.39 million homes are for sale — up 23% from last year and available inventory would last 4.3 months, the longest in more than four years.
Source: National Association of Realtors
New Home Sales
New home sales reached a one-year high in September as mortgage rates fell and builders offered more incentives to reduce elevated inventories, which currently represent 7.6 months’ supply. New single-family home sales increased 4.1% last month, after dropping 2.3% in August, and prices were little changed from a year ago at $426,300 but remain almost 30% higher than at the end of 2019. The increase is probably due to the drop in mortgage rates last month and may be short lived after dropping to a 2-year low in August as affordability remains low and builders are trying to move inventory.
Summary
The trends in the data identified above point to continuing challenges in the housing market. There is a massive supply and demand imbalance because the resale market is still locked up. Although buyer interest improved after the Fed move in September, mortgage rates rose quickly in October so activity will likely remain subdued. Mortgage rates remain elevated, and show no signs of coming down meaningfully, while prices remain high and builder confidence (HMI) remains well below the historical average of 52. The volatility in rates is a primary driver for the lack of inventory and until rates come down, or homeowners find a rate that they are comfortable with, little with change.
The 10-year U.S. Treasury has posted three consecutive closes above the 200-day moving average for the first time since early July. Mortgage rates have moved in tandem with the U.S. Treasury 10-year yield which closed October 23 at 4.24%, the highest since late July and up from a 15-month low of 3.61% on September 16, which was two days before the Fed lowered borrowing costs by 50 basis points.