October 14, 2022

The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi, I’m Lauren Saidel-Baker and thank you so much for joining me for this episode of ITR Economics TrendsTalk. Today, let’s talk housing. You might have seen a new forecast from ITR for the single-unit housing market. So today, I wanted to unpack what exactly we mean with this forecast revision and, more importantly, what we don’t mean.

First of all, I want to say this forecast revision was more of an adjustment. We still haven’t changed our outlook for the US consumer as a whole. We still see general financial strength in most of our consumer indicators. So this housing market adjustment really was driven by one key trend, and that’s been affordability.

You probably know that the housing market in most major areas was red hot in 2021. All of those pandemic trends, all of the people movement, the extra consumer finances from the stimulus, it just caused a lot of heating up in most housing markets. Of course, all housing markets are regional, but nationally, we do see some strained affordability metrics. So, that’s been causing a little bit of a pullback in some of the housing-specific indicators that we follow. The critical one, and when I talk about the housing market, what I really mean is our single-unit housing starts figure.

So what that is is a measure of volume. It’s the number of units started. We aren’t talking about prices here. We’re talking about the volume of new starts when that shovel breaks earth, and we start digging out the foundation. So as affordability has been strained both through higher prices of homes as well as through rising mortgage rates, we’re starting to see some adjustment in that new construction sector. Now, I don’t want to scare anyone. Whenever we talk about recession or any pullback at all in the housing market, everyone gets flashbacks to 2006, ’07, and ’08.

We are not setting ourselves up for anything like that cliff that happened in the housing market back then. In fact, if anything, we nationally have been under building for most of the past decade, really since the Great Recession. So we still have some inventory problems. We still do need more housing stock. Even with this stretched affordability, there is still demand for homes, and the consumer is still on relatively strong financial footing. So expect a bit of a correction. Again, a cooling off from that red-hot housing period in 2021.

But critically, what we are not forecasting is change in housing prices. Now, all housing markets are incredibly regional, so it matters which state, or even more granularly, which metro area you’re looking at. But generally, there has been aggressive rise in housing prices, especially last year. The pace of that rise might not be sustainable for much longer, but we also don’t expect to see a collapse in housing prices. I don’t have a specific forecast for you here, but we can look back historically and compare housing sale prices to mortgage rates, and we find an interesting relationship really that there isn’t one. We would expect that as affordability gets strained as those mortgage rates increase, home prices should come down to compensate, but we just don’t see that relationship.

There are many periods throughout history, multi-year periods when mortgage rates were rising, and home prices just kept rising right along with them. So don’t take this as a one-to-one necessary condition that because mortgage rates are going up, home prices must adjust to the downside. That’s why we like to follow the leading indicators instead, and we hope you follow them with us. Thanks so much for joining me for this episode of ITR Economics TrendsTalk. I’m Lauren Saidel-Baker. Let’s talk more soon.