Thoughts

May 26, 2023 | 13:36

U.S. Housing: Flat Is the New Down

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)

The U.S. housing market’s foundation is firming, but it’s unlikely to provide much of a springboard for a robust recovery this year.

In the resale market, April existing home sales fell for a second straight month after spiking higher in February, which marked the only increase since early last year. Even with depressed sales, listings remain sparse with a 2.9-month supply. Despite mortgage rates more than doubling since 2021, property owners haven’t been forced to sell because most have a job, and many are reluctant to list because they have a sweet deal on a long-term mortgage. While pending home sales held steady in April, a 5.2% slide the prior month has levels basically back to those mined during the pandemic shutdown and Great Recession. Timelier data show new mortgage applications fell again last week and continue to plumb the lowest levels in eight years.

Conditions are somewhat better in the market for new homes, with sales jumping 4.1% in April, the sixth increase in seven months. Unlike the resale market, new home supply is more ample at 7.9 months at the current sales pace. The lack of resale listings has buyers kicking the tires on new home lots. Also helping is that prices have fallen more than in the resale market. The median new home price soared from just over $300,000 (nsa) in the spring of 2020 to nearly $500,000 last October, but has since pulled back to $421,000 in April, or by 15%. Builders are more eager to sell than current owners. The upturn in new home sales likely explains the recent bottoming in housing starts, though they remain 22% below year-ago levels. Moreover, sagging building permits flag little chance of a snappy rebound. Although the NAHB homebuilders’ index continues to grind higher, it’s merely back to a neutral level and still down 28% from a year ago.

Home sales are unlikely to see a strong bounce this year for several reasons. First, the economy is expected to slip into a mild downturn, lifting the jobless rate by over one percentage point. While the slump is unlikely to cause much distress (unlike in 2008), it should douse buyer enthusiasm. Second, qualifying for a mortgage has become even tougher due to the recent regional bank stress. Third, mortgage rates are unlikely to retreat much if the Fed stands pat this year, as anticipated. And fourth, due to the minimal pullback in resale prices, affordability remains the poorest in more than three decades. The National Association of Realtors’ index, which compares mortgage payments to family income, has fallen of late on a backup in mortgage rates after improving around the turn of the year.

Bottom Line: After a lengthy correction following the pandemic bubble, the U.S. housing market has found its footing, but is unlikely to recover much until next year when the Fed reduces rates and the economy regains momentum. And, if the Fed is forced to tighten policy further to contain inflation, the market could resume a downward slide.