Tthe housing statistics for his morning were, on the face of it, not very good. The overall number of housing starts showed a decline of almost 10% compared to last month, against a consensus expectation of a decline of almost 3%. There was a small relief in the number of building permits which was a little higher than expected, but despite everything, it seems that the housing boom is well and truly over. But does that mean house prices are about to take a dive?
This morning’s numbers may have been officially worse than expected, but they were hardly a surprise in a logical sense. The Fed announced two consecutive three-quarter point rate hikes and says there is more to come, and mortgage rates are significantly higher than the ultra-low levels that fueled the boom as a result. It makes every home more expensive for anyone who doesn’t just shell out the cash, and it’s not the only thing that puts off potential buyers.
There’s also the fact that for the past six months TV pundits have been talking about a coming recession. For most homebuyers and consumers, that word brings back memories of 2008, a time when unemployment soared and house prices crashed, leaving many struggling. They watch the big jump in house prices over the past two years, hear heated discussions about whether we’re heading into a recession or are we already there, and have a perfectly understandable reluctance to buy, fearful of ‘reach the top. of the market.
This logic is used by pundits around the world to explain a bad number and, by extension, to predict a crash in house prices before too long. There is, however, an obvious problem with this view: even as rates have risen and recession talk has become commonplace, real house prices, despite jumping so dramatically, have yet to turn. the back. The average rate of increase across the country has stabilized over the past two months, but prices remain high, as does housing demand.
The sharp rise in prices over the past two years has been as much due to insufficient supply as to a post-covid increase in demand. Combined labor and commodity shortages have thwarted homebuilders’ attempts to ramp up production after slashing to next to nothing in the spring of 2020, and those issues have yet to go away. Against this backdrop, a larger-than-expected decline in housing starts could be due to a large number of unfinished projects due to labor and material shortages, and a sign that demand satisfaction remains problem. This would be something that would help support prices even with the obvious interest rate headwinds, not a warning of an impending collapse.
Builders, it seems, are now less inclined to build to spec and are waiting for confirmed orders. If so, that only means they reflect price stabilization, not that demand has collapsed. Granted, homebuilder sentiment has fallen below 50 from a high of around 90 late last year, indicating a negative outlook for the market, but that is inevitable given all the known issues. Homebuilders are human beings and as such will have seen the rate hikes and heard the bleak economic forecasts. If these predictions turn out to be true, prices will crash, but they are not yet true, and there is now a growing feeling that they will not be in the near future.
The biggest danger for house prices is that when conventional wisdom comes from a strong consensus, it can become a self-fulfilling prophecy. If enough experts are shouting loud enough that a crash is imminent, potential buyers will be discouraged and prices will indeed fall. The days of every house that comes on the market being the subject of a mad bidding war may be over, but there is evidence that there is still a housing shortage. So, unless a full-scale recession accompanied by high unemployment occurs, house prices are unlikely to collapse any time soon.
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