May 12, 2023
Rising interest rates and home prices have been deterring would-be home buyers, but are there positive signs ahead? Tune in to the latest episode of TrendsTalk with ITR Economist Michael Feuz to find out!
The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.
Hi, I’m Michael Feuz here at ITR Economics and welcome to this episode of ITR TrendsTalk. Today as I sit in my office here in Virginia, I can hear the sounds of heavy construction machinery just next door in the adjacent 70 acres to my house, starting to move earth around as they prepare that land to build somewhere between 300 and 500 new homes. That really leads me to what I want to talk to you about today, US home sales and unpacking our outlook for the overall residential construction market.
It’s no secret. We’ve seen a housing downturn very much driven by affordability issues coming from the Federal Reserve driving up interest rates, along with rising home prices. This has certainly deterred those would-be home buyers. Especially those first time home buyers who are even more so concerned about that monthly payment and driving up interest rates from 3% to 6% can seem like a lot, especially for those who have been used to those or got comfortable with those very low interest rates, or at least the idea of them.
When we do talk about housing at ITR, we are typically talking about US single unit housing starts, and this is a volume based metric. So what this means, and this is when shovel breaks ground. So it’s measured in volume, it’s units started. Now we are beginning to see some early signs positivity. Now as I just mentioned, single unit housing starts has been declining and has declined through March down to about 929,000 units. That is a decline of about 18.4% from the year ago levels.
Now, these early hot signs of positivity that the low is near and that we’ll certainly transition from that phase D recession to that phase A recovery first comes from new homes sold in the US. The three-month moving total, or the three MMT has risen since November. That 312 rate of change has risen the past two months. So this is an early sign that buyers are slowly starting to get back in the market. Now, mortgage rates, which hit their high in March of 2023 has started to ease from that high. If that easing continues, we could expect more and more buyers to get back in the market as those interest rates come down off that peak.
Now another great early indicator and a very typical early indicator if you’re building homes, before you can even break ground, what do you have to get? Permits. So US single housing permits, the 312 rate of change has started to rise for the past month. So another good early sign. One month of data, maybe not what you want to hang your hat on, but if we put it into the collective bucket of green shoots that we’re starting to see, again is starting to point to that, we’re going to hit that cyclical low and we’ll begin moving on to that rise.
Another area that I do want to draw your attention to as well is really the health of the consumer. Despite the financial headwinds, inflation, rising interest rates, the consumer is financially well positioned still from real incomes being up to as well as delinquencies being low, being able to handle the debt that we are carrying. If you look, one of those delinquencies is residential delinquencies is at a 15-year low. This should offer some assurance that as the housing market moves into recovery and then the subsequent growth, that we shouldn’t get an influx of financially ill-equipped home buyers that’ll turn into anything like a bubble or 2008 type of situation.
Finally, I want to leave you with this last little bit of insight, and that is what can the housing market, specifically the US single unit housing starts, tell us and inform us about the US industrial production overall? If you’ve been following ITR, you’re familiar that we’ve been forecasting that we expect a macroeconomic and industrial production, a really industrial economy downturn in 2024.
This is again, being driven by what I’ve mentioned, the policy pursued by the Federal Reserve driving up interest rates. Typically, housing starts leads the industrial economy by several quarters. So while we’re forecasting this low in housing in the second half of this year, that would inform our expectations that we would expect to see the low in industrial production in the second half of 2024.
Now, housing demand and construction activity, that can impact industrial activity. When housing demand picks up, construction activity picks up. When construction activity picks up, that creates demand for construction machinery production, for production of parts and supplies that go into building homes and construction supplies, as well as other industrial products. So that is the typical economic train of how that all fits together.
Now, if you are in the residential construction space, this is a good time to start beginning to think strategically that if we’re going to move from this phase D recession into this phase A recovery, are you positioned to capitalize on the recovery and really the subsequent growth to follow that phase A recovery, that phase B accelerated growth? Do you have the capacity to handle increased activity and to really capitalize on the opportunity as this housing market turns from cyclical decline to cyclical up?
So there you have it. While we’re still seeing that decline in the housing market, we’re getting those early signs now that the low is near approaching, fast approaching, could still be a few months out. So I don’t want to jump the gun there, but we’re starting to get those early signs. So start to take notice and start preparing your business for that activity increase, or at least that slow down to start to ease.
So here at ITR Economics, we love speaking with you and helping you navigate all the different phases of the business cycle. So thank you for joining today. I’m Michael Feuz at ITR Economics and I look forward to hearing from you and speaking with you on the next episode of TrendsTalk.