U.S. Housing Market Shows Tentative Signs of Stabilizing

Scott Anderson
Chief Economist
Bank of the West

The interest rate-sensitive U.S. housing market was among the first sectors to buckle when the Fed began to hike interest rates in March 2022. Although softening was apparent prior to the first rate increase after an extended period of elevated home sales and rapid home price appreciation – existing home sales started declining year-on-year in August 2021, seven months before the Fed’s rate-raising campaign began – the rapid and sustained pace of rate hikes cratered home demand as affordability worsened.

However, there are emerging signs that suggest the housing market could be stabilizing. Mortgage purchase applications increased 2.4% over the past month and are now running just 26.5% below year ago levels. At the beginning of January mortgage purchase applications were running 44% below year ago levels. This suggests as mortgage rates stabilize at higher levels, some potential homebuyers are becoming more comfortable taking the plunge.

Mortgage Purchase Applications Stabilizing
In addition, homebuilder sentiment is on the mend. The NAHB/Wells Fargo Housing Market Index (HMI) climbed to 50 in May, easily topping the consensus forecast of 45. Homebuilder sentiment has risen for five straight months and May’s reading is the first since July 2022 that was not in negative territory. The NAHB’s HMI correlates strongly with single-family housing starts out to six months in the future, pointing to steady near-term U.S. housing activity.

Homebuilder Sentiment Has Increased For Five Months
The most recent data on homebuilding confirms the trend. Housing starts rose 2.2% month-on-month in April – bucking expectations for a 1.4% decline – as 30-year mortgage rates dropped 20 basis points to 6.34% in April. Homebuilders are also benefitting from low existing home inventories, with new existing home listings down nearly 22% from a year ago, according to Realtor.com. With mortgage rates now double what they were a year and a half ago, some potential sellers are hesitant to move to another home at a much higher interest rate.

Housings Starts Climb In Two Of Last Three Months
Moreover, the level of building permits at 1.42 million annualized units in April is still comfortably above the long-run average of 1.15 million from January 2009 through April 2023.

Despite these glimmers of hope for homebuilders, general housing market conditions clearly remain challenged. Total existing home sales, that make up 90% of all home sales, fell another 3.4% in April – a slight deterioration from the 2.6% slide in March. Existing home sales have declined sequentially in 14 of last 15 months amid higher mortgage rates, low affordability and fear of a U.S. recession which prompts households to postpone purchases of big ticket items like homes.

U.S. Housing Market Outlook
Notwithstanding the recent encouraging string of housing market data that implies that parts of the housing market may be stabilizing, we do not think the overall downturn has run its course. The Fed will need to keep monetary policy restrictive and mortgage rates high for at least another year to bring inflation back to target, while labor market conditions are expected to deteriorate noticeably in the second half of this year as a mild recession likely takes hold. Indeed, we forecast existing home sales will continue to decline through the end of this year before modestly improving in 2024.

Existing Home Sales Forecast To Keep Dropping This Year
Weaker existing home sales, buyer affordability challenges, and deteriorating labor market and credit conditions will likely keep existing home prices on the defense well into 2024. The Realtors Association reported median U.S. home prices declined year-on-year for two straight months in March and April for the first back-to-back decreases since early 2012. The peak-to-trough slump in U.S. home prices is forecasted to be around 7.3% based on the Case-Shiller National Single Family Aggregate

To learn more, check out this week's U.S. Outlook Report.


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