The Line: Homebuilding is Picking Up Big Time

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

Today is all about housing, with good news on homebuilding, existing home sales, and mortgage rates.

Homebuilding is Picking Up Big Time

Two reports came out this week that gave us very positive news about homebuilding in the U.S. The most impressive was the May data on housing starts, which rose by 291,000 units to an annual pace of 1.631 million. That increase might not sound that huge, but it was the biggest jump in units since January 1990. I was a sophomore in college in January 1990, so I can vouch for the fact that it was a long time ago. This number blew away expectations, with huge gains posted for both single- and multi-family units. Housing starts are 5.7% higher than a year ago.

In the same report, we found out that building permits rose 5.2% last month, although they remain 12.7% lower than a year ago. Building permits are important to watch, as they are one of the ten components of The Conference Board’s Leading Economic Index. For those who are curious, that index declined by 0.7% in May.

So why are builders building so much? Well, that question leads us to the second bit of good news this week. The National Association of Home Builders/Wells Fargo Housing Market Index rose to 55 in June. That might not sound exciting, but it’s the first time since July 2022 that the index was over 50. A reading over 50 means most builders view conditions as good. It also marks the sixth-straight monthly increase—a very positive sign for new residential construction.

So, builders are ramping up construction because they are more optimistic about the future. Sounds good, but are they jumping the gun a bit? Rates are still high, economic growth is expected to slow further in the coming months, and there’s already a 7.6-month supply of new, single-family homes for sale in the U.S.

Enough of the negative, let’s look at why builders should be excited. The NABH/Wells Fargo report noted that fewer builders reduced prices this month (25%), down from a peak of 36% in November 2022. There has also been a decline in the percentage of builders offering incentives in the past few months.

Perhaps the biggest reason builders should be excited is the small number of existing homes for sale. The National Association of Realtors announced this week that there remains just a 3.0-month supply of existing homes for sale. Any number under 4 months indicates a tight market. For more on NAR’s May existing sales report, see the next item. The point is that housing demand is still there, and with so few available existing homes, buyers will turn to new construction.

Finally, there are a lot of economists out there saying that the housing market has bottomed out. Fed Chair Jerome Powell—who’s not actually an economist—said after last week’s FOMC meeting: "We now see housing putting in a bottom, and maybe moving up a bit." He also said inflation was transitory—sorry, had to say it—but I would tend to agree with him on housing.

Lower Prices = More Existing Home Sales

Existing home sales rose slightly in May, their first monthly increase since February. Compared to a year ago, sales are down 20.4%. A 3.1% decline in median price—the biggest annual price decline since 2011—seems to be the main reason for the uptick in activity.

While the supply of homes for sale rose 3.4% last month and is 15.4% higher than a year ago, at 3.0 months, inventory remains very low. NAR Chief Economist Lawrence Yun had this to say about inventory:

"Available inventory strongly impacts home sales, too. Newly constructed homes are selling at a pace reminiscent of pre-pandemic times because of abundant inventory in that sector. However, existing-home sales activity is down sizably due to the current supply being roughly half the level of 2019."

So, while lower prices can cause a tiny increase in existing home sales, activity won’t get back to pre-pandemic levels until inventory gets back to pre-pandemic levels.

One Last Bit of Good News

Completing our trifecta is the latest on mortgage rates. According to Freddie Mac, 30-year conforming mortgage rates fell this week for the third week in a row. That’s certainly good news, but as an economist, I must point out that rates are still almost 1% higher than a year ago. Expect rates to continue to move lower, as inflation has come down dramatically over the past year.

Subscribe here to receive The Line in your inbox.