Housing Falls Suddenly

The housing market has been hanging in there as of late, even as many other economic sectors have faltered with high inflation and rising interest rates.

Last month, though, a key indicator for the housing market showed that the sector might finally be taking a hit.

According to data released by the Census Bureau this week, April saw a big drop in the number of new housing starts compared to last year. In fact, the total number of new private housing units that were under construction in April dropped 22.3% from the same month in 2022. 

The annual rate for new housing starts sat at 1.401 million in April, which is adjusted for seasonal variation. While that’s down considerably from April of 2022, it did represent a 2.2% increase from March of this year.

A sign that more trouble could be ahead is that the annual rate of new permits to build (adjusted for seasonality) was 21.1% lower in April of this year compared to April of last year. That metric is seen more as an indication for where future construction is likely to go.

Commenting on the data from the Census Bureau report, Kurt Rankin, a senior economist at PNC, said:

“At April’s 846,000 units annualized pace, housing starts have a long way to go to regain the 1 million-plus levels seen throughout 2021. But, a housing market bottom does appear to be in sight thanks to limited supply and the attractiveness that offers to builders.”

The Federal Reserve Bank has been working hard over the last nearly two years to stamp down inflation, and it’s doing so by aggressively increasing the benchmark interest rate. While that rate doesn’t have a direct impact on mortgage interest rates – which are more closely tied to the 10-year U.S. Treasury note – it has still had an indirect effect on the overall housing market.

At the beginning of 2022, for instance, the average interest rate for a 30-year fixed-rate mortgage was a little more than 3%. In November of 2022, that average soared above 7%. The national average as of May 18 was 6.96%.

While mortgage interest rates have gone through the roof recently, the sales price of homes haven’t dropped enough to offset it. What that has done is made many homes unaffordable to a lot of buyers.

Over the last three years, the median monthly mortgage payment was almost $2,100, according to the Mortgage Bankers Association, which compiles that data. In April of 2020, that number was $1,128, an increase of more than 85%.

All of this has resulted in much lower overall home sales in the past year, as homebuying is simply out of reach for a lot of people.

At the same time, there could be some hope for the future. The National Association of Home Builders reported this week that its builder confidence index increased by five points to 50, which marks the first time it wasn’t in the negatives since last July.