Two reports in the week ending October 23 show just how weak the housing market is at a time when potential homeowners face the perils of an uncertain job market, higher interest rates, and inflation eating more disposable income with less prospect of higher wages.
The October NAHB/Wells Fargo housing market index fell for a second consecutive month to 29, its lowest level since 29 in June 2012 when the recovery from the housing collapse was inching its way back. Homebuilders’ confidence has fallen sharply with the jump in mortgage rates that compounds the problems of costlier materials and labor, lack of skilled labor, and finding suitable land to build on.
The component for present sales dipped a small two-tenths to 33 which suggests that current buyers are using mortgages obtained in September before the rate for a fixed rate mortgage topped 7 percent, or using adjustable rate loans to qualify for a mortgage. However, both the expected sales and buyer traffic indexes fell five tenths to 32 and 18, respectively. This points to conditions where homebuilders will not be starting construction without a buyer contract. Potential homebuyers are waiting until they can find the right combination of property, price, and loan before seriously entering the market. With the FOMC likely to continue to raise rates soon to fight inflation, it may be a while before that occurs.
The September report on housing starts and permits indicates that homebuilding has already been slowing for the past three months. The drop of 5.2 percent to 1.221 million units in starts was the lowest since 1.182 in May. While it remains above pre-pandemic levels, until mortgage rates decline enough to improve affordability, starts are likely to trend down further. The number of permits issued was essentially unchanged at 1.400 million units in September from August. However, permits for single-family homes was down 4.0 percent to 845,000 units while multi-unit permits were up 6.1% to 555,000 units. The recent firming in multi-unit home construction suggests that builders are more willing to invest in the kind of housing that is more likely to appeal to those buying their first home and who find townhouses an affordable option.
The Freddie Mac rate for a 30-year fixed rate mortgage is averaging 7.37 percent for October to date compared to 6.95 in September and 6.68 in August. Although the weekly average has moderated slightly to 7.32 percent in the October 22 week, it will take several weeks of declines before potential homebuyers feel tempted to return to home shopping, much less homebuying.
