– Despite rising mortgage rates, single-family permits for new homes have continued to rise
– This is because larger homebuilders have made deals, cut prices, and paid down rates to attract buyers and grow their market share
– Construction employment has held up, as there are many new homes that still need to be finished
– Single-family starts have outperformed apartment starts, despite the increase in mortgage rates
– The confidence of homebuilders has faded, but the grab for market share by larger builders has kept new home sales growing
– Housing completions have not shown much improvement, as builders are working through their backlog slowly
– Housing permits have remained stable, with single-family permits picking up while multi-unit permits decline
– The market share wars between large builders and smaller builders have benefited the economy and kept construction and permits going
– More construction can continue if mortgage rates decrease, as they have been restrictive for growth in the past.
When market players say housing leads us into a recession, it traditionally means the
Federal Reserve raised rates too much, housing slowed down as a result and a job-loss recession isn’t too far off. But a funny thing happened this year for the U.S. economy: single-family permits kept rising as new home sales were showing year-over-year growth. How did this happen when mortgage rates rose from the lows earlier in the year?
It happened because big homebuilders made deals, cut prices, and paid down rates, all to grow market share. The more prominent homebuilders are flexing their financial muscle over smaller builders and peeling off buyers to help sell homes. This has kept construction workers employed and they have the money to spend on goods and services.
One of the early indicators of a job-loss recession has failed to materialize, as construction employment has held up so far. Since we have a lot of new homes where construction hasn’t even been started yet — the most ever at 105,000 new homes — construction workers are still needed to finish those homes.
Today’s housing starts data beat expectations, but the storyline has been the same all year: the apartment boom is fading while single-family starts have done better than anyone could imagine, especially with mortgage rates increasing to 8%. In the chart below, you can see that 5-unit permits are heading lower, the opposite of the chart above with single-family permits.
Housing Starts: Privately‐owned housing starts in October were at a seasonally adjusted annual rate of 1,372,000. This is 1.9 percent (±13.5 percent)* above the revised September estimate of 1,346,000, but is 4.2 percent (±10.0 percent)* below the October 2022 rate of 1,432,000.
Considering all the factors that the housing market has had to deal with, housing starts, as we can see in the chart below, have held, and we still have a lot of single-family homes in the works that need to be finished. If mortgage rates head lower, that will be a positive for the builders as more prominent builders have shown the capacity to pay down rates to move products.
The homebuilder’s confidence has faded recently, but a big reason is that smaller builders can’t pay down rates as much as bigger builders, so this grab for market share is keeping new home sales growing in a higher rate environment.
Housing Completions:Privately‐owned housing completions in October were at a seasonally adjusted annual rate of 1,410,000. This is 4.6 percent (±11.6 percent)* below the revised September estimate of 1,478,000, but is 4.6 percent (±13.2 percent)* above the October 2022 rate of 1,348,000.
Housing completions is still one of the saddest charts we have had post-COVID-19: housing completions haven’t gone anywhere for years, and I don’t see this changing anytime soon to the positive side; the builders are working off their backlog and slow and steady wins their race.
Building permits: Privately‐owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,487,000. This is 1.1 percent above the revised September rate of 1,471,000, but is 4.4 percent below the October 2022 rate of 1,555,000.
The one bright spot for the builders is that housing permits have held the line here as the 5-unit boom comes crashing down, and single-family permits have picked up. That, and the backlog of new homes that are under construction or not yet started, has kept Americans employed and working. As we can in the chart below, permits have stabilized and are slowly moving upward.
The market share wars between large builders and everyone else have helped the economy with new single-family construction and permits. Not all builders have excess profit margins to spare to buy down rates. More construction can continue if total mortgage rates are headed lower. However, considering mortgage rates got to 8% — which is very restrictive for construction growth — the builders have found a way to keep things going; they simply throw more money at it.
Property Chomp’s Take:
When it comes to the housing market,
Traditionally, when the Federal Reserve raises interest rates, it can lead to a slowdown in housing activity and eventually result in a recession. However, this year has been different. Despite the increase in mortgage rates, the number of single-family permits and new home sales have continued to rise.
This unexpected trend can be attributed to the strategies employed by big homebuilders. These companies have made deals, cut prices, and paid down rates in order to gain market share. By doing so, they have been able to attract buyers and sell more homes. This increased demand has helped to keep construction workers employed and stimulate the economy.
Another factor that has contributed to the resilience of the housing market is the large number of new homes that are still in the construction phase. With over 105,000 new homes yet to be started, construction workers are still needed to complete these projects.
Despite the fading popularity of apartment buildings, single-family housing starts have exceeded expectations. This can be seen as a positive sign for the industry, especially considering the increase in mortgage rates. If mortgage rates were to decrease, it would further benefit the builders and potentially lead to even more growth in the market.
However, not all builders have the financial capacity to lower rates and attract buyers. Smaller builders, in particular, struggle to compete with the strategies employed by larger builders. This has led to a disparity in confidence levels between big and small builders.
Housing completions, on the other hand, have remained stagnant for years. The slow pace of completions indicates that builders are working through their backlog of projects at a steady pace.
Building permits, on the other hand, have remained steady, with single-family permits showing an upward trend. This stability in permits, coupled with the backlog of projects, has helped to keep construction workers employed and maintain a level of economic activity.
In conclusion, the market share wars between large homebuilders and smaller builders have had a significant impact on the housing market. The actions of big builders, such as cutting prices and paying down rates, have helped to drive demand and keep the industry afloat despite rising mortgage rates. The number of single-family permits and new home sales have continued to rise, providing stability to the construction sector and supporting the economy. While there are challenges ahead, such as the slow pace of housing completions, the housing market has shown resilience in the face of adversity.