Thoughts

October 25, 2024 | 13:01

All Quiet on the U.S. Housing Front

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

We last wrote about the soggy U.S. housing market in the spring, expressing a lack of optimism for a quick recovery. And, the market has only weakened further since then. Existing home sales fell for a sixth time in seven months in September to the lowest level in 14 years and 30% below pre-pandemic levels (Chart 1).

The much smaller new homes market is doing better than the resale market, with sales jumping to a 17-month high in September. That’s partly due to greater availability—a 7.6 months’ supply versus 4.3 in the resale market, and resulting lower prices this year. Home builders are more eager than owners to cut a deal. Owners with sweet pandemic-low mortgage rates are hunkering down, reluctant to move and risk refinancing at today’s higher levels. The effective mortgage rate for current owners is tucked below 4%, compared with 6.5% for the current 30-year fixed mortgage rate.

Lack of affordability, rather than availability, is the greater challenge for the market. Simply put, it’s far cheaper to rent than buy, with rent increases cooling faster than prices this year. The median rent on new apartment leases fell 0.7% y/y in September as apartment vacancy rates rode a wave of construction higher. Meantime, although earlier heated price gains have cooled, they’re still outpacing family incomes. Median resale prices rose 3.0% y/y in September, while disposable personal income per capita is running in the 2½% range. Some earlier progress on affordability has partly reversed due to a recent back-up in bond yields, keeping it near generational lows. While the effective 30-year fixed mortgage rate is down from last year’s 23-year high of 7.8%, it’s still more than one percentage point above levels that are likely to attract prospective buyers.

Understandably, home builders are cautious, with the NAHB index holding in contraction territory for a sixth straight month in October. Although housing completions remain high, that’s largely due to the large pipeline of condos that were started in a friendlier rate climate, notably in the South. Units under construction are now falling fast as housing starts have returned to more normal pre-pandemic levels.

There aren’t many soft patches in the U.S. economy right now, but the housing market is one of them (along with manufacturing and office construction). Fed easing will support a recovery, but don’t expect a snappy rebound anytime soon.