Housing, a key component of the economy and often a harbinger of its direction, has been doing well on the surface. But given continued high mortgage rates and dwindling affordability, how long can that last?
Housing starts rose 7% in September to 1.358 million, missing the consensus forecast of 1.383 million.
While last month’s results were still pretty good, most of it was multi-family building in Southern states, not single-family homes, observed Peter Essele, head of portfolio management for Commonwealth Financial Network, in a research note. In investment terms, houses usually deliver more profit.
More importantly, the number of new apartment units is declining. This suggests “that new construction may follow suit in the coming months,” he wrote.
New home sales were also up in September, certainly another good sign, signaling continued strong demand. It may not be sustainable, however. “The accumulating effect of higher mortgage rates (and interest rate costs for builders themselves) are denting sentiment” for the future, wrote Jamie Cox, managing partner in the Harris Financial Group. “Such will only make shelter more expensive and unaffordable for the most interest rate sensitive borrowers.”
Meanwhile, sales of existing homes are lower: 3.96 million homes were sold in September, down from 4.68 million one year prior, according to the National Association of Realtors. Small wonder: Prices have climbed high, likely due to the lagging inventory of new homes (ongoing since the Great Financial Crisis), and now there is the added burden of lofty mortgage rates. The St. Louis Fed’s Housing Affordability Index slid 16% as of last month, compared with September 2022.
Interest on a 30-year fixed-rate mortgage averaged 7.63% for the week ending October 19, according to Freddie Mac. One year earlier, the 30-year mortgage averaged 6.94%. Interest on a 15-year fixed-rate mortgage averaged 6.92% as of the same date, up from 6.23% a year earlier.
Despite some growth, the overall situation appears little better, in part because the Federal Reserve has indicated it is in no hurry to lower interest rates. “High interest rates will restrain housing construction, sales, prices and employment into 2024,” commented Bill Adams, the chief economist at Comerica Bank.
“Underneath the surface, there is trouble brewing in housing,” warned Harris Financial’s Cox.
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Tags: affordability, apartment units, existing homes, Freddie Mac, Housing, mortgage rates, multi-family, sales, St. Louis Fed, starts