Housing Remains an Opportunity, Despite Mixed Data
The U.S. economic growth is slowing, consumers are carrying higher credit card balances, job openings are shrinking, and housing construction is weakening. The doomsayers are becoming louder even as voices from the Federal Reserve system continue to indicate that the economy is so strong that interest rates will remain higher for longer. Whom to believe? When we look beyond the headlines, we see areas of broad strength alongside weak spots. Even the so-called weak spots, such as housing, may be stronger than the alarmist headlines would have you believe.
Residential investment contributes roughly 3-5% to total gross domestic product through new home construction and related services. But indirectly, it is said to play a much larger role as new buyers fill those homes with appliances, furniture, textiles, dishes, and lots of other gear. Last Thursday, it was reported that housing starts for April came in below expectations and downward revisions reduced figures for the prior two months. Those in the market, know that mortgage rates have been climbing since December, although they remain lower than last year’s October peak. Since the spring of 2022, housing starts have fallen as rates have risen (the pink line smooths out the month-to-month variation):
Housing Starts and Mortgage Rates Since 2021
Source: Bloomberg, LLC
Note, however, that housing stats have actually been improving over the last several months as the 30-year rate has come off its peak. This reflects the strength of demand for homes and the lack of availability (but more on that below) as younger adults increasingly enter the market. Home ownership for adults under 35 is hovering just under 40%, as compared to just over 65% for all adults. This younger cohort’s continued move out of shared apartments with friends (or their parents’ basements) into their own homes is expected to sustain demand for new homes for several years to come. Housing start data includes both single-family homes and multi-unit residences (apartments and condos), but even the rental opportunities are failing to offer younger adults options, as vacancies remain scarce there:
Home Ownership and Rental Vacancy Rates
Sources: U.S. Census Bureau, Rental Vacancy Rate in the United States [RRVRUSQ156N] and Homeownership Rate in the United States [RHORUSQ156N], retrieved from FRED, Federal Reserve Bank of St. Louis.
Moreover, those borrowing to purchase a home have among the highest credit scores we’ve seen in the last twenty years, which suggests that the financial foundation of this group of consumers remains solid:
50th Percentile Credit Score Mortgage Originations
Source: Federal Reserve Bank of Philadelphia, Large Bank Consumer Mortgage Originations: Original Credit Score: 50th Percentile [RCMFLOSCOREPCT50], retrieved from FRED, Federal Reserve Bank of St. Louis.
But as anyone who’s tried to buy a house will know, there are very few existing homes on the market. And this reflects two key dynamics: first, U.S. construction of single-family homes dropped sharply in the decade after the financial crisis; and second, anyone with a 3% mortgage is loath to give that up and move. And even if they did move, all of them would need another place to live (unless they moved in with kids, parents, or joined a commune). It is possible, though, that net supply of single-family homes could rise if sellers were choosing to move out of a house and into a multi-family establishment – and this may very well be the case for baby boomers looking to reduce their maintenance burden. Still, that’s not happening in sufficient numbers as owners hang on to properties with low mortgage rates.
Housing Starts Since 1995
Source: Bloomberg, LLC
New housing demand runs at roughly 1.5 million per year, but U.S. home construction is still running below that at its current 1.3-1.5 million pace, even with the recent rebound, so no progress is being made yet to eliminate the structural housing shortage. This was discussed by our CIO, Chuck Lieberman, in Barron’s in February. Not only do homebuilders have an opportunity to raise production to keep up, they also are trying to overcome the shortage of houses from that long period of underbuilding. Homebuilders, therefore, face a market where sales of new homes are likely to grow at a solid pace for several years to come.
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