Where Are We Going?

Housing Remained Strong in the First Quarter of 2022. However, the Economic Environment is Changing. Beware of the Second Half of the Year.

By: Charles C. Shinn Jr., PhD
President, Builder Partnerships

Total housing permits for the first quarter of 2022 were up 6.3% over the same period last year. Single family permits recorded only a 0.6% increase while the multifamily sector grew by 18.1%. Multifamily permits have continued to show very strong activity with the March permits exceeding last March’s permits by 29.4%.

The total housing starts during the first quarter registered an increase of 10.3% over the first quarter of last year. Single family starts were up 3.9% over last year, and multifamily starts expanded 26.5% during the first quarter. The multifamily sector has remained strong with very low vacancies and continually increasing rental rates. The March housing starts reveal some softening with the total seasonally adjusted rates of starts only registering a 3.9% increase over last March, with a decline in singly family starts of 4.4% while multifamily expanded 28.1% growth in activity. The seasonally adjusted rate of 1.793 million total starts in March is the strongest pace of activity since June 2006. The 593,000 seasonally adjusted multifamily starts rate has only been exceeded by the total multifamily starts in 1986.

Single family housing starts have been artificially delayed by home builders. Builders are experiencing exceptionally long construction times due to supply chain issues and labor shortages. Finished lots are in short supply. The inflation of building material costs is currently running at an annual increase of 23.2% according to the producer price index for residential construction. Currently, homes not started or homes under construction account for over 90 percent of new home inventory. Sales of homes not yet started rose sharply in March increasing 26.2% on a seasonally adjusted average.

New home sales during the first quarter were down 8.6% from the first quarter of last year. The Northeast and Western regions both registered increases of 10.5% and 8.5% respectively. The Midwest was down 9.2% and the South which is the region with the most sales, dropped 10.2%.

In March, all of the regions recorded a loss of sales from February. Compared to March of last year, the Northeast and Western regions registered increases of 12.8% and 21.0% while the Midwest and Sothern regions declined 13.8% and 24.7% respectively.

New home inventory at the end of the quarter represented 6.4 months of supply. However, only 35,000 or 8.6% of the inventory was complete. There were 259,000 homes or 63.6% of the inventory under construction and another 105,000 homes or 25.8% not started. The lack of both new and existing housing supply, strong demand, the inflation of housing costs, supply chain issues, and extended construction schedules have been driving sales prices.

The median new home sales price in March was $436,700 which is an increase over last March of 21.4%. The average new home sales price rose 26.3% since last March to $523,900. Many builders have been controlling their rate of sales with home buyer waitlists and limited monthly home releases for sale and start.
The existing home market has been strong. However, sales have decreased for the last two months, dropping to a 5.77 million seasonally adjusted rate in March which is an 11.1% drop since January. The decline in sales appears to be more of a supply problem than a demand problem. Currently, there is less than a two-month supply of homes on the market. The typical home is sold within 17 days and 87% of the homes on the market are sold in less than a month. The median existing home sales price in March was $375300 which is a 15% increase from a year ago. This represents the 121 consecutive month of year-over-year increases which is the longest streak on record.

Housing affordability has become a major issue with the monthly mortgage payments increasing 32% in the last year. The housing affordability index in March dropped 51.2 points in the last year from 175.2 to 124.0.

Mortgage interest rates have been rising since last fall. The 30-year fixed mortgage interest rate in April was 4.98% up 62.7% from the 3.06% rate last April according to Freddie Mac. On May 5, the rate on a 30-year fixed rate mortgage was 5.27%.

My caution flags are out for the second half of this year. Currently, inflation is running at 8.5%, which is the highest rate since 1981. The price index is up 11.2% for the year at the end of March. To combat inflation, the FOMC raised the federal funds rate by 25 bp in March and another 50bp yesterday. It is expected to raise the rate again at the June 14–15 meeting by another 50bp with another 50 bp increase on the table for this year. In addition, it is planning to begin shrinking the Fed’s balance sheet by $30 billion of Treasury securities and $17.5 billion worth of mortgage-backed securities.

There is now open discussion about a recession for the second half of this year. The first quarter of this year registered a negative 1.4% GDP. Technically, two consecutive negative quarters is the definition of a recession. Some analysts think we are already in a recession. This is a self-inflicted wound by the current administration which will impact our industry as mortgage interest rates continue to rise and affordability declines. The economy was over fueled, causing inflation, and delayed action to respond has created the emergency.

This decade is still the best decade for housing. The housing demand will continue to be strong as the millennial and baby boomer generations are on the move throughout the decade. For demand to be realized, the three components of need, desire, and ability should be present. The need is present, but we may be going through a period over the next six to nine months of the desire and ability being impacted by inflation, increasing interest rates, and reduced affordability. Builders need to be developing plans to weather the storm that is brewing to offering variable rate mortgages, interest buy downs, discounts, and other programs used previously. Be prepared to survive some turbulent times.

Data Updated: April 30, 2022
(March 2022 Data)

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