US housing market analysis: Recent trends shaping the market

What factors are driving the significant downturn in US housing starts, accompanied by a decrease in building permits?

Amidst a challenging economic climate, the US housing market has faced significant hurdles in recent months.

Persistently sticky mortgage interest rates and a lack of movement from the Federal Reserve contributed to a drop in US housing starts in March.

Total US starts declined 14.7% from February to a reading of 1.321 million units on a seasonally adjusted annual basis (SAAR). Housing starts were off 4.3% from the year-ago level, again led lower by pronounced weakness in the multifamily sector.

While single-family starts dropped 12.4% from the prior month, they remained 21.2% above the March 2023 level. However, multifamily starts declined 21.7% last month, and were down 44.3% year over year. The continued weakness has surprised some analysts.

“With rates going higher and rents still flattish nationally, a lot of those projects are just not pencilling,” said Dustin Jalbert, Fastmarkets economist.

The 30-year fixed-rate mortgage as reported by Freddie Mac dipped as low as 6.60% in January, but has been unable to break lower in the months since. Rates have risen in recent weeks with higher-than-expected inflation reports preventing the Federal Reserve from cutting the prime rate as previously expected.

US mortgage rates hit year-high, breaking 7%

In a significant shift that impacts potential homebuyers nationwide, US mortgage rates have climbed to new heights this year.

“The 30-year fixed-rate mortgage surpassed 7% for the first time this year, jumping from 6.88% to 7.10% in late April,” said Sam Khater, Freddie Mac’s chief economist. “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year. Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”

Key factors impacting housing affordability

As the calendar turned to April 18, 2024, homeowners and potential buyers faced a new reality in the mortgage landscape. The average rate for a 30-year fixed-rate mortgage climbed to 7.10%, marking a noticeable rise from the previous week’s average of 6.88%. This uptick represented a significant shift from the more comfortable average of 6.39% seen just a year prior.

Similarly, the 15-year fixed-rate mortgage wasn’t spared from the upward trend, as it reached an average of 6.39%, up from the previous week’s 6.16% and starkly higher than the 5.76% average of the year before. These increases underscore a dynamic and evolving mortgage market, reflecting broader economic currents and impacting homeowners and buyers alike.

Builders are grappling on several fronts as the inflation fight continues.

Carl Harris, chairman of the National Association of Home Builders

“Builders are grappling on several fronts as the inflation fight continues,” said Carl Harris, chairman of the National Association of Home Builders (NAHB). “Higher interest rates are increasing the cost of housing for prospective home buyers and raising the development and construction cost for builders of homes and apartments. At the same time, shelter inflation is rising faster than overall prices due to supply-side challenges.”

Decline in regional housing markets

On a regional basis, housing starts declined by hefty double-digit percentages in the Midwest, Northeast, and South, but climbed 7.1% in the West. The West and Midwest have posted strong year-over-year gains, while the Northeast and South have declined.

Housing permits also declined in March, falling to 1.458 million units (SAAR). Permits are up slightly year over year.

The NAHB/Wells Fargo Housing Market Index flattened in April at 51. While still slightly in the positive range for single-family construction, it is the first month without an increase since November.

US home sales drop, median price climbs in March

US existing home sales fell in March as higher interest rates and house prices side lined buyers from the market.

Home sales dropped 4.3% last month to a seasonally adjusted annual rate of 4.19 million units, the National Association of Realtors said on Thursday. Economists polled by Reuters had forecast home resales slipping to a rate of 4.20 million units.

Sales fell in the densely populated South, the Midwest, which is considered the most affordable region, and the West. They rose in the Northeast for the first time since November. Home resales, which account for a large portion of U.S. housing sales, declined 3.7% on a year-on-year basis in March.

The US housing market is facing a complex set of challenges, from inflation and high-interest rates to regional disparities in housing starts and sales. Staying informed is crucial for industry professionals and investors looking to navigate this volatile landscape.