Mortgage Rates Diminish Building

Housing starts, also known as new home construction, fell 14.4% in May to the lowest level in 13 months; April starts were revised higher. Both single and multifamily starts fell during the month as higher mortgage rates and ongoing delays to construction took a bite out of demand. All-cash buyers and investors have been pulling out. Supply chain disruptions hit the construction industry particularly hard.

The silver lining is the number of homes currently under construction, which hit 1.67 million. That is 24% higher than a year ago and a new record. That will help to alleviate supply shortages a bit.

Single-family home starts fell 9.2% in May to the lowest level since August 2020. The Northeast, the smallest housing market in the country, was the only region to record monthly gains. The hottest markets over the last few years have been concentrated in the South and West; both regions have experienced the hottest home price growth on record. That is already slowing as mortgage rates hit above 6% in June. The speed with which mortgage rates have risen is as detrimental to demand as the level increases in rates.

According to one analysis, a 6% mortgage rate at a median home price of $400,000 prices out about a third of those who could have afforded the mortgage at a 3% rate. The pool of potential buyers is shrinking fast; first-time buyers are being crowded out, while older home owners remain reluctant to trade down to a condo given the low mortgage payments they have locked in with their existing home.

Multifamily starts of five units or more fell almost 27%, the biggest drop since August 2020. Those losses were concentrated in the South and West. The two regions have been ramping up multifamily construction as the influx of young professionals looking for a new home was met with very little supply. Many who moved to these regions during the pandemic found themselves priced out of the housing market and forced to rent; rental vacancies have been at record lows.

Separately, permits to build a home, an indicator of future construction, fell 7% in May. Losses were broad-based. Builder sentiment reflects this drop, as confidence fell to the lowest level in two years in June. Sentiment over buyer traffic is officially in contractionary territory, a sign of slow future demand. Mortgage applications to purchase homes are half what they were a year ago.

Bottom Line
Mortgage rates rose ahead of rate hikes by the Fed and will continue to rise; the Fed started the arduous and unknown process of reducing its bloated balance sheet, which includes mortgage-backed securities in June. Housing remains the proverbial canary in the coal mine; its song is getting softer.

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