Housing starts fell to a 1.17 million-unit rate in June following downward revisions for the month of May. The weakness was spread out across regions and showed up in both the multi- and single-family markets.
The largest losses occurred in the single-family market here in the Midwest. We have recently seen a slowdown in builder confidence along with applications for new mortgages. The weakness is worrisome because the supply of homes for sale is still tight, especially at the entry level. Builders are not moving downstream because of escalating costs, including tariffs on Canadian wood, and acute labor shortages.
The slowdown in construction follows a drop in home sales from one year ago. Tight inventories were a factor along with rapid increases in prices and the uptick in mortgage rates.
Why do we care? The housing market tends to lead the rest of the economy. Historically, it has been the first sector to enter a recession and the first to exit an expansion. The market last peaked in 2005, two years before the economy slipped into recession. This cycle has differed from others in many ways but I am beginning to worry that we are coming close to a peak in overall economic growth this year.
The housing market is showing signs of weakness. Some of that is structural with contractors unable to build homes at a profit where the demand is strongest, among first-time buyers. This is a major shift from the past. We will be watching closely in the months to come, given the key role that housing plays in predicting the timing of the business cycle peaks.
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