Housing Market ‘In Free Fall’ As New Construction Plummets

The number of housing starts, or new houses on which construction started, plunged 14.4% to about 1.5 million last month from 1.8 million in April—sharply below economic projections calling for nearly 1.7 million starts, the Census Bureau reported Thursday.

Building permits also fell more than expected, coming in at less than 1.7 million in May despite expectations they would remain roughly flat from April at about 1.8 million. In emailed comments Thursday, Pantheon Macro chief economist Ian Shepherdson attributed the sharper-than-expected decline to an “abrupt and rapid” drop in new-home sales facing builders, who “overbuilt” since early 2021 to capitalize on demand that’s now “in free fall” and must slow construction to prevent a big hit to profits.

“This is still the early stages of the housing rollover,” adds Shepherdson, predicting the next few months will bring further steep declines in housing construction as additional interest rate hikes make home buying more expensive and push demand even lower.

Home builder stocks took a hit after the data, with the S&P Homebuilders Select Industry Index, which includes home-manufacturing giants such as Masco and Owens Corning, plunging more than 4% Thursday, while the S&P 500 fell 3%. One bright spot in the report: Home completions climbed to the highest level since 2007, which should help home price increases—clocking in at the quickest pace this century—slow from about 20% to the low single digits by the end of next year, says Comerica Bank chief economist Bill Adams.

Historically high savings rates and government stimulus measures helped ignite a home buying frenzy during the pandemic, but signs of a slowdown have quickly emerged as the Federal Reserve embarks on its most aggressive interest-rate-hiking cycle in two decades. According to data released last month, pending home sales slid for the sixth consecutive month in April to the lowest level in nearly a decade, while new home sales plunged nearly 17% from March. More recently, the average interest rate on the popular 30-year fixed mortgage spiked 5.5% to more than 6.2% this week—the highest level since the 2008 financial crisis.

The Fed’s Wednesday rate hike is “likely to accelerate the slowing of the housing market” and eliminate construction jobs, says Mace McCain, chief investment officer at Texas-based Frost Investment Advisors. “We’ll be watching job openings and layoffs closely as the Fed continues to tighten into a slowing economy.”54

“[Fed Chair Jerome] Powell yesterday said the housing market is undergoing a reset, but it’s much more than that,” says Shepherdson, referring to comments Powell made after instituting the largest interest rate hike in 28 years on Wednesday. Speaking to reporters, the Fed chair suggested rising mortgage rates may not be long-lived, saying, “Home buyers need a reset. . . . Ideally, we do our work in a way where the housing market settles in a new place and housing and credit availability are at appropriate levels.”

Jonathan Ponciano

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business

Source: Housing Market ‘In Free Fall’ As New Construction Plummets—Here’s When ‘Reset’ Could Cool Prices

Critics by Dean Baker

Given other economic data it is certainly plausible that the rate of house price decline is accelerating. The unemployment rate has risen by more than 3 percentage points from its low in 2007, with involuntary part-time rising by another 2 percentage points. If there are twice as many people who fear unemployment or short hours as who actually end up unemployed or working short hours, then the weak economy would have reduced the number of potential homebuyers by 15 percent.

In addition, the plunge in house prices will also reduce demand, since it has destroyed home equity. By some estimates, close to 20 percent of mortgage holders are underwater. After deducting realtor fees and other closing costs, tens of millions of current homeowners would not have enough equity left to make the down payment on a new home. In this respect, many long-time homeowners will face the same difficulty as first-time homebuyers in raising the money needed for a down payment. With the sharp drop in the stock market destroying savings, few of these homeowners will have enough financial wealth to make a down payment.

The danger in this situation is that house prices will go into a downward spiral, with declining house prices destroying equity. The loss of equity reduces the number of potential buyers in the market, putting further downward pressure on prices. This sort of downward spiral will have further negative effects on the economy. As homeowners lose more equity, they will feel the need to cut back further on consumption. In addition, with more homes underwater, default rates will rise with the losses on each foreclosure increasing.

Unfortunately, there has been little real discussion to date of measures that could arrest this sort of price decline. A serious effort would focus on sustaining prices in markets where the bubble has already deflated. Efforts to sustain house prices in markets where the bubble is still deflating will almost certainly fail, and will result in the government wasting money on a failed effort.

However, in the markets where sale prices are in line with rents, it would be desirable for the government to try to prevent prices from overshooting. It can do this by directly intervening in the market, buying up foreclosed properties. This could be an effective policy that carries little downside risk. In fact, this policy certainly carries less risk than continuing to allow Fannie Mae and Freddie Mac to guarantee mortgages in markets where the bubble is still deflating……

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