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Single-Family Housing Starts Forecast

July 1, 2022

Ongoing weakness in new home sales has led us to amending our forecast for Single-Family Housing Starts. See what else contributed to this adjustment and what it means for 2023 and beyond with the latest episode of TrendsTalk with ITR CEO and Chief Economist Brian Beaulieu.



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

Hi, I'm Brian Beaulieu, CEO and Chief Economist for ITR Economics. Thank you for joining me for this edition of TrendsTalk. This edition is about the whys of us reducing our single-family housing starts forecast for '22 and the ripple effect that has on '23 and '24.

We don't make a forecast just to see how long it can go. We make our forecasts to give you our best estimate of what's going to happen. Our prior forecast had housing starts for single-family homes, stalling into the third quarter of 2022, and then beginning to pick up thereafter. And the latest indications are that that's not likely or as likely to happen. Mind you, we change the forecasts while results are still in forecast range, which is something we do from time to time because, again, it's not how long can we keep the forecast in place. It's how much service can we be to you.

What you see going on now that makes us want to push that soft spot out a little bit further is the ongoing weakness in new home sales. It's steeper and it's lasting longer than we thought it would be when we look at the early signs of a cyclical reversal in that realm. We're also looking at existing home sales being weak. And I think perhaps the most damaging is single-family permits. That trend is weaker than we thought it would be as we cruise through May. We have only May data at this time.

Initially early in this year, we thought it was Omicron that was causing softness in the permits trend. But tied in with the weaker than expected trend in new home sales, and it's lingering decline in permits now in the second quarter, it seems like there's more than Omicron at work. To be clear, this isn't a function of the interest rates going up. And I know that's where the mind naturally jumps to is that the interest rates are going up, so of course, housing is soft. It's too soon for that. We have lots and lots of data, and it takes a minimum of a year before you see a change in how interest rates negatively impact housing starts.

It is true that 30-year fixed rate mortgages have gone up much steeper than they normally do. It seems like they may be baking in some additional Fed funds rate increases, but we think that's a future problem. That's not what this is about. This is more about incomes and about the government withdrawal from the economy. Incomes are showing some weakness adjusted for inflation because the stimulus checks are no longer flowing. And to a certain extent, and you can see this even when you look at the housing trend, it's like running on nitrous oxide and that nitrous oxide has been removed. So the trend is now normalizing back down to appropriate levels, appropriate being sustainable normal levels. That shows up some weakness in the data. The government has certainly curtailed their spending more than we thought they would on the other side of COVID. That may have been a surprise to them, also. Don't really know, but that ties into a general lessening of momentum in that sector.

And then there's also the consumer's weariness, perhaps because of all this recession talk, but I don't really think that that's it either. We've never been able to find an instance where the consumer can get talked into a recession or where that becomes a self-fulfilling prophecy. I think it may be more just the withdrawal, the income phenomena, more than anything else, and the government withdrawal more than anything else.

Instead of the weakness ending in the third quarter of 2022, we have it ending in the second quarter of 2023. That means that we think 2022 is going to come in about 3.7% weaker than we previously had the number. So instead of a modest gain for '22, we're now looking at a 1.9% decline, '22 versus '21. For 2023, the percentage deviation from the prior forecast looks to be about 6.8% on the negative because we're losing a lot of that first half spring season, at least the extent of that spring season that we previously thought we were going to be able to garner.

We think '23 is going to come in around 2.3% ahead of 2022. For 2024, we have built in a 5.9% year over year increase. That's a little bit stronger, about a percentage point stronger increase year over year than previously. And some of you may be wondering, well, how is that going to happen when interest rates are going up? Again, it's the lead-lag timing relationship that doesn't preclude this slight modest speeding up in housing starts. We are still looking at a relatively low inventory situation. The consumer is still fundamentally strong. And the Fed unwinding, I think is going to prove to be more one of attrition at least through 2023.

And don't forget, and you're not hearing this in the mainstream media, less inflation is on the horizon, and that means interest rates are going to stop going up. They may plateau. If the Fed becomes concerned enough, they may even drop it 50 bibs out there in the future, who knows, but they're not going to keep going up toward pace once we hit 2023. And it's that stabilization of interest rates that can be good for the housing market. The supply chain easing, cost structure becoming more rational, all of that's going to factor into a smoother flowing economy, and we think that's going to be reflected in housing in 2024.

The extended view for single-family housing because of the rate increase, how fast it has happened already in mortgages, we're more concerned about '25 as a whole than we previously were. '25 has to do and '26 has to do with the rate changes that are going on today. '22 and '23 are more about income changes than the rate changes. And the consumer just seems to be stuck in this slightly declining trend. From peak to trough, we're calling for single-family housing starts in this cycle to be down 3.7%. The minimum normal decline from peak to trough is 6.2%. So we're not talking for a normal decline. This is a very, very mild deal, but it is a change from our prior forecast. And because we hold ourselves accountable and because transparency is one of our core values, we wanted you to know about it.

This is not changing our outlook for a soft landing for the economy. I'll be writing a blog and you'll see from the chart, which is hard to depict here, that housing can waffle like we're talking about here in '22 into '23, and it doesn't mean GDP's coming down. It doesn't mean industrial production is coming down. It means housing has this soft spot, but not the overall economy. That, right now, is not changing.

Thank you for listening to this edition of TrendsTalk. I look forward to next time.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.