The teflon housing market

Lined up to buy a new home in Levittown, 1950

May data is pretty much in the can, but if you were hoping for a little clarity on where the housing market (or, for that matter, the economy) is headed, you’ll be disappointed. Americans are bound and determined to make economists look bad, and so far they’re killing it.

First it was a strong jobs report: 339,000 new jobs last month was a 15% increase over April. Then the inflation rate fell to 4.0% from 4.9% in April. Next came housing starts. Single-family starts were 997,000 annualized, up 18.5% from April. Multifamily starts landed at 634,000, up 27.1% from April and 33.2% YoY.

Now new and existing home sales are out and they’re up, too. Existing home sales in May were 4,300,000 annualized, still down 20.3% YoY but up 0.2% from April. New home sales were 763,000, up 12.2% from April and up 20% YoY.

So what’s driving the housing market? Whatever it is, it isn’t that affordability is improving. The median new home price in May was $416,300—down 7.6% YoY but still up 33% since May 2019.

The median existing home price was $396,100, up for the fifth straight month and up a whopping 42% vs. May 2019. And don’t forget mortgage rates: 6.67% for a 30-year loan last week vs. 3.84% at this point in 2019.

According to OECD’s data (which may or may not be calculated the same as the Census Bureau or the National Association of Realtors), the U.S. is a clear outlier vs. other wealthy countries. As of Q1 2023, YoY prices in the U.S. were down just 0.5%. Germany, Sweden, South Korea, and New Zealand were all down double digits and Canada was not far behind.

The question is why the U.S. market is holding up while everyone else is crashing. Bloomberg columnist Allison Schrager says “the explanation is straightforward if not exactly simple: the 30-year mortgage.”

30-year fixed mortgages are a uniquely American institution, made possible by the fact that Fannie Mae and Freddie Mac buy them en masse and take them off banks’ balance sheets. “In absence of government intervention,” says Schrager, “no sane banker would lend a single household so much money for 30 years at a fixed rate.”

At the moment, says Redfin, 90% of U.S. mortgage holders are paying less than the current mortgage rate. 62% pay less than 4% while 23.5% are paying less than 3%. Not surprisingly, no one wants to let go of those rates. “That constrains supply and keeps prices from falling very much,” says Schrager.

Schrager worries that it’ll eventually come back to bite us. “In the long term, the U.S. housing market will be much less fluid because people are tied to their mortgages,” which may lead to “a less dynamic U.S. economy for years to come.”

Maybe. So far, dynamic has been the least of our problems. In virtually all sectors of the economy, the No. 1 issue is that demand has badly outrun supply.

That includes the housing market, of course. The U.S. homeownership rate as of Q1 2023 was 66.0%. That’s well below the all-time high of 69.4% in Q2 2004 (due to criminally lax lending standards), but just slightly above the long-term average—65.6% since 1980.

We’ve still got room for more homeowners, and demand is not in doubt. In a Dec 2022 NerdWallet survey, 83% of respondents said “buying a home is a priority for them.” The only catch, says NerdWallet, is that “many buyers have unrealistic home price expectations.” Respondents who plan to buy this year say they “hope to spend $269,200 on average.”

All that adds up to three trends that seem pretty rock-solid unless something big changes:

1) When the next single-family boom finally kicks into gear, the emphasis will be on smaller, simpler, cheaper houses built as quickly as possible. The current struggles of high-profile offsite suppliers may be just a head fake.

2) Wage pressure will only get worse, especially as the working age population declines. In 2016, 63% of Americans were between 18 and 65 years old. By 2030 that’ll fall to 59%—and they’ll all want to earn enough to buy a home.

3) You need to get your butt into the remodeling market now if you aren’t already there. Even if you do it only to offset your low-margin production business, that’s where the action will be.

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