The Housing Market Still Isn’t Showing the Full Effects of Rapidly Rising Mortgage Rates

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Record-low existing inventory will support residential construction and new-home sales. Total housing starts rose 0.3% to 1.793 million annualized units in March. Single-family starts fell 1.7%, while multifamily starts rose 4.6%, with most of the gain coming from apartment buildings. Single-family starts remain strong, at a 1.2-million-unit pace. Building permits fell 1.9% from the previous month, but the recent strength in permits for both the single-family and multifamily sectors bodes well for starts later this year. The strength in housing starts at the beginning of the year likely reflects some easing in supply constraints that have affected the home-building sector since the beginning of the pandemic. Multifamily starts, fueled by low vacancies and rising rates, will rise 6.5% from last year. Single-family starts will increase 1.5% in 2022.

New-home sales remain strong, but will lose some momentum as we move further into 2022. New-home sales fell 8.6% in March, to a 763,000-unit pace. At the current sales pace, it would take 6.4 months to sell out the supply of new homes for sale. The inventory of new homes has been trending up for the past 12 months, and reached 407,000 in March. Much of the inventory gain, however, has been in homes that have not yet been started and homes that are under construction. Sales fell in all four regions of the United States, led by a substantial 10.2% drop in the South. The median price of a new home was $436,700 in March, which is 21.4% higher than it was a year ago.

Amid rising mortgage rates and tight inventory, and with home-buying sentiment faltering, existing-home sales are likely to slow down to 2% growth in 2022. The start of the Federal Reserve’s tightening cycle in March is already having a modest impact on existing-home sales, which fell 2.7% to a 5.77-million-unit pace in March. Sales are down 4.5% from a year ago. Single-family sales fell 2.7%, while condo and co-op sales declined 3%. The modest pullback in demand has led to slightly more homes for sale on the market. Inventories remain tight, but they did rise 11.8% in March. Despite elevated prices and lean inventories, demand for homes is still robust. Listed homes remained on the market for an average of 17 days in March 2022, down from 18 days in March 2021.

House prices are set for a quieter 2022, with price growth slowing down to around 5% by year-end. Strong price growth is universal for all types of homes – entry-level, move-up and luxury. Homeowners aren’t finding many suitable homes to move into, so they’re largely staying put, pushing the number of new listings on the market to record lows. At the current sales pace, the unsold inventory equates to just a two-month supply of homes. A normal level would be closer to five months. The S&P CoreLogic Case-Shiller National Home Price Index rose 19.8% in February from a year ago, up from 19.1% in the previous month. While home prices continued to advance at a very rapid pace at the start of the year, the environment is evolving rapidly and it is unlikely to support strong price growth for much longer.

The 30-year fixed mortgage rate will end the year at around 5.5%. The average rate on this type of loan has increased more than 200 basis points from a year ago. That is starting to have an impact on demand, with mortgage applications recently falling to a level not seen since the height of the COVID-19 pandemic two years ago.