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Existing home sales soften in March while permits and starts rise
*U.S. housing market headwinds are mounting. Underlying demographic drivers, lack of supply, and expectations of robust home price appreciation in the near term should continue to support housing market activity. However, average 30-year fixed mortgage rates have shot up in the last three months to 5%+, crimping mortgage origination and weighing on housing affordability, which will likely cool the pace of home price appreciation from its current elevated rate. New construction continues to be challenged by material and labor shortages, leading to significant construction backlogs.
*Existing home sales ticked down 2.7% m/m in March, following a downwardly revised 8.6% m/m decline in February, reflecting a mix of declining affordability and limited supply (Chart 1). On an annualized basis, existing home sales declined to 5.8m, their lowest level since June 2020. The fall in sales was concentrated in the Midwest and South, where sales declined 60k and 80k annualized, respectively. The supply of existing homes remains limited despite a 100k increase in the number of existing homes available for sale in March. According to Redfin, the median home spent an average of 18 days on the market in the first week of April, compared to 28 days in the first week of January.
*The median sales price of an existing single-family home gapped up to $382k, which paired with rising rates has driven housing affordability to its lowest level since 2008, according to the NAR’s housing affordability index (Chart 2). The percentage of respondents to Fannie Mae’s National Housing Survey indicating now is a bad time to buy a home jumped to a record high 73% in March. Mortgage originations have declined sharply in recent months, with the MBA’s mortgage application index falling 26% in the last eight weeks, reflecting a decline in both refinancing and purchase applications.
*Housing starts and building permits ticked up 0.3% and 0.4% m/m respectively, defying consensus expectations of modest declines (Chart 3). March’s increase in starts was underpinned by robust growth in multifamily starts of 30k annualized over the month while single-family starts softened, falling 20k. Multifamily starts spiked in the Northeast, more than tripling from 70k to 230k annualized, offset by a 170k annualized decline in housing starts in the South (Chart 4). Inclement weather and omicron restrained starts earlier in the year, particularly in the Northeast, while supply and labor shortages are likely to continue to weigh on new construction, although there are early indications bottlenecks are easing.
*The strength in multifamily starts was mirrored by a 70k increase in multifamily building permits, while single-family permit issuance declined to 1.2m. The number of housing units permitted but not started climbed to a fresh high of 280k, reflecting a sizable backlog of construction projects that could be started in coming months. Housing completions edged down to 1.3m, while the number of units under construction climbed to a record 1.6m, partly reflecting the jump in multifamily construction (Chart 5).
*Home builder sentiment is deteriorating. The National Association of Home Builders’ (NAHB) Housing Market Index fell for the fourth consecutive month in April driven by declines in leading indicators of demand, although the index remains elevated relative to historical levels (Chart 6). Prospective home buyer traffic fell 6pts to 60, the lowest level since August, with the NAHB noting “builders report sales traffic and current sales conditions have declined to their lowest points since last summer”.
Chart 1. Existing Home Sales
Chart 2: NAR Housing Affordability Index
Chart 3: Housing Starts and Building Permits
Chart 4: Housing Starts: Multifamily and Single Family
Chart 5: Multi-family Housing Starts in the Northeast and South
Chart 6: NAHB Housing Market Index – Prospective Buyer Traffic and Current Sales
Mickey Levy, [email protected]
Mahmoud Abu Ghzalah, [email protected]
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