Weather impacts may be contributing to the decline in housing starts, but it looks like homebuilders are downshifting.
Homebuilder sentiment and housing starts data are signaling cooler economic growth ahead as high prices and mortgage rates weigh on buyer demand. The NAHB/Wells Fargo Housing Market Index (HMI) declined for a fourth straight month in August. Homebuilders have noted declining traffic, and a third of builders dropped prices to boost sales in the most recent month. Nearly two-thirds of survey respondents offered incentives to homebuyers. Housing starts have been well-correlated with movements in the HMI since the inception of the index in 1985, and recent starts have held to script. Single-family housing starts have fallen for five months in a row through July, and at an annualized 851,000 they were below the nearly 905,000 home average over the past decade. Single-family permits have now declined in each of the past six months. Multifamily starts are also running below the prior decade trend but have ticked higher over the past two months. High interest rates have an acute impact on homebuilders due to both increased borrowing costs and weaker homebuyer demand and the Fed increasingly risks shutting down the housing supply spigot through restrictive monetary policy. The good news is that the probability of the Fed beginning to cut rates in September is high. Additionally, most HMI responses were received before the recent decline in mortgage rates that caused mortgage applications to surge. The downward trend in homebuilding over the past several months, along with an uptick in the inventory of homes for sale, should give the Fed additional evidence that rate cuts are warranted. That said, similar to recent labor market data, severe weather has likely played a role in reducing single-family construction starts and it remains to be seen how the Fed will choose to interpret the data. What’s your take? Is this the beginning of a more protracted decline in homebuilding? or just a bump in the road?