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After two years of record growth, the housing market has reached a turning point as elevated home prices and surging mortgage rates weigh on affordability and demand. Buyer traffic has fallen, inventories have risen, and sellers are increasingly reducing asking prices.
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The drop in house-price growth will reduce builders’ willingness to start new projects this year. Total housing starts fell 9.6% to 1.446 million annualized units in July. Single-family starts fell 10.1%, while multifamily starts dropped 8.6% for the month. Single-family starts have stumbled over the last few months as surging mortgage rates have dampened demand for homes. Builders are still having trouble completing new projects amid ongoing labor and supply shortages. Total housing permits, which lead starts by a month or so, fell 1.3%, with single-family permits falling for the fifth month in a row. This suggests further moderation in single-family construction this year. Total permits continue to outpace total starts, suggesting a collapse in residential construction is unlikely this year even as mortgage rates remain above 5%. Multifamily starts, fueled by low vacancies and rising mortgage rates, will rise 15% from 2021. Single-family starts will fall 8.3%.
New-home sales are on track to fall 16% in 2022. New home sales fell 12.6% in July to a seasonally-adjusted annual rate of 511,000 units – the slowest pace in more than six years. New home sales have fallen in six of the past seven months. The decline led the inventory of new homes to increase to the highest level since March 2008. Higher mortgage rates have caused many potential buyers to cancel contracts or delay plans to buy a home, as they can no longer afford higher monthly payments. The surge in new home inventories is helping moderate home-price growth. The median price of a new home rose 5.9% in July and it’s up 8.2% from a year ago. The year-over-year gain peaked at 24.2% in August 2021.
Existing home sales have further to fall and will be down 11.6% in 2022. Sales of previously owned homes fell 5.9% in July. Existing-home sales have fallen every month since February and are down more than 22% from a year ago. Much of the decline in sales are due to the sharp rise in mortgage rates over the past seven months. Reduced affordability is taking a toll on home buyer sentiment. Higher mortgage rates are driving a pullback in mortgage demand as applications for purchase have fallen about 30% from their peak in January. There were 1.31 million homes on the market at the end of July, which is up 4.8% from the prior month and unchanged from a year ago. Despite elevated prices, homes are still selling quickly. Homes remained on the market for 14 days in July 2022 and 82% of homes sold in July were on the market for less than a month.
Home-price growth is set to slow down to around 11% by year-end. The surge in home-price growth has sent home prices well above the peak hit during the housing bubble, but growth is starting to slow down. The S&P CoreLogic Case-Shiller National Home Price Index rose 18% in June from a year ago, down from 19.9% in the previous month. Mortgage financing has become more expensive as the Federal Reserve has hiked interest rates in an effort to bring down inflation. The largest home price drops were in Seattle and San Francisco, where prices fell 1.89% and 1.32% on a non-seasonally adjusted basis, respectively. Prices continued to rise in Phoenix and Las Vegas, but a much slower pace than in recent months.
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