The U.S. economy and the housing industry have performed better than expected this year. However, both are showing signs of weakness in the face of the Federal Reserve’s battle against runaway inflation. In January 2021, the inflation rate was 1.4% below the Fed’s target of 2.0%. As inflation rapidly expanded, peaking in June at 9.1%, it was treated as transitory. No monetary action was taken by the Fed until March 2022, when it raised the Fed funds rate by a mere 25 bps, the first of 10 hikes totaling 500 bps by May 2023.
The Fed paused rate increases this month, but is expected to resume them with another 25 bp increase in July. The consumer price index (CPI) inflation rate in May registered at 4.0% with core inflation (excluding food and energy) rising at an annual rate of 5.3% which is still too high. The justification for the June pause was to evaluate what impact the rapid rate increases and recent bank failures (which have resulted in tightening standards for commercial lending) will have on the slowing economy. The Fed maintained its current pace of quantitative tightening, rolling off its balance sheet $60 billion of treasury securities and $35 billion of mortgage-backed securities. It is not anticipated that there will be any monetary easing until the first or second quarter of 2024.
The U.S. gross domestic product (GDP) grew 5.9% in 2021, declining to 2.1% annual growth in 2022. The first and second quarters of last year both registered negative growth of 1.6% and 0.6% respectively which typically defines a recession. However, employment growth has remained strong, recovering from the pandemic shutdown. Average monthly job growth this year has been 435,000 new jobs. Unemployment increased slightly in May, to 3.7% (a seven-month high), but it is still low. GDP growth for the first quarter of this year only registered a 1.3% increase. Wells Fargo is forecasting an annual GDP growth of 1.5% this year and only 0.1% growth for 2024.
The manufacturing sector of the economy is weak, especially durable goods. The ISM manufacturing index is at the lowest level since 2020, and there are clear signs of a recession in this sector. The service sector is also showing weakness, with May registering the fourth consecutive month of decline. Retail sales have held up exceptionally well, but half of the categories are showing decline, especially durable goods. Consumers are running out of steam, money, and credit. The consumer confidence index has dropped below the average level of 2022, with both the present situation index and the future expectation index declining at levels associated with a recession.
The U.S. treasury yield curve has been inverted since last October. Short term interest rates are higher than long term interest rates, which historically has been a very reliable indicator of an economic recession occurring within six months to 18 months. The forecast for a recession continues to get pushed into the future. Currently, economic forecasters are predicting a recession late this year or in the first half of next year. Most forecasters now believe the recession will be mild and brief. Others are talking about a rolling recession through the economy. If it is a rolling recession, housing may have experienced its recession during the fourth quarter of last year when the Feddie Mac 30-year mortgage interest rate rose to 7.08% in October, up from 3.05% at the beginning of 2022. If this is the case, housing is in a recovery.
Existing Homes Sales
Existing home sales declined 17.8% in 2022, to 5.03 million. The sales rate dropped below 5.0 million in July, and continued to fall throughout the rest of the year. In May of this year, the sales rate dropped to 4.3 million homes, effectively flat from April, and 20.4% below May 2022. All regions experienced a decline in sales rates from last May. Existing home inventories are still very low with only about three months of supply with homes on the market typically for 18 days. The median existing home sales price was $396,100 in May, down 3.1% from last year, but it has been consistently strengthening this year from the low of $361,700 in January. Pending home sales in March and April were down over 23% from last year, signaling further problems in the existing home sales segment of the industry.
New Home Construction
Total new home permit activity was down 4.1% in 2022 from 2021. Single-family permits were down 12.5% while multifamily permits increased 10.9%. This year, total permits are down 19.8% from 2022, with single-family permits off 25.5% while multifamily permits have declined 9.9%. Total May permits increased 5.2% from April, with single-family permits up 4.8% and multifamily up 5.5%. Compared to last year, total permits are down 12.7% with single-family permits down 13.2% and multifamily down 12.3%.
Total housing starts in 2022 were down by 3.0% from 2021. Single-family starts declined 10.8% with activity slowing in July through the rest of the year due to mortgage rate increases. Multifamily starts increased in 2022 by 15.5%. This year, total housing starts are down 15.5% from last year, with single-family starts off by 24.3%. Multifamily starts are ahead of 2022 year-to-date by 3.2%. May total housing starts snapped back with a 21.7% increase from April, and a 5.7% increase from last year. Single-family starts increased 18.5% from April, but remain behind the start rate recorded last May. Multifamily starts in May increased 28.1% from April, and 39.6% from last May. The multifamily segment of the housing market is still showing strength.
New Homes Sales
New home sales in 2022 were 16.9% below sales in 2021. The median sales price increased 15.3% to $457,800. As of May 2023, year-to-date new home sales are only down 4.7% from 2022. The southern region is ahead of 2022 by 1.6%, while the western region is down 20.7%.
New home sales in May surged 12.2% over April to a 763,000 annual rate. May was the third consecutive month of increased new home sales and recorded a fifteen-month high since February 2022. Feddie Mac 30-year mortgage interest rates had dropped below 6.5% and had stabilized at about 6.4%. In addition, home builders were offering incentives, including interest buy downs, interest locks, paid closing costs, and option upgrades to stimulate sales. The lack of existing home for-sale inventory has forced buyers into the new home market. The new home for-sale inventory has been fairly stable at around 430,000 homes, currently representing about 6.7 months of supply versus the three months of supply for existing homes. The median sales price in May for new homes has declined7.6% from last year to $416,300. The May median sales price dropped 16.2% from the high recorded in October 2022 of $496,800.
The need and consumer demand for housing is very strong during this decade. I refer you to my white paper, The Roaring 2020s: Housing’s Best Decade
, which can be downloaded from our website. Consumer demand consists of three components: need, desire, and ability. Current economic conditions with uncertainty, inflation, rising interest rates, and the threat of a recession temporarily impacted two of the components (desire and ability). Housing demand will roar back once the general economic problems are resolved.