The Line: Another Rough Month for Housing

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

The July housing reports are out, and here are the discouraging headlines:

• Existing home sales down 5.9% in July, and 20.2% lower than a year ago

• July new home sales 12.6% lower than June, and 29.6% below July 2021

• Pending home sales fell 1% in July, and were down 19.9% from one year ago

• Housing starts declined for the third straight month to a 17-month low
  

Hopefully I haven’t ruined your day, but I think such well-informed readers as yourselves already know that housing is struggling right now. In fact, the chief economists of both NAR and the National Association of Home Builders have flat out said the U.S. is in a housing recession right now.

How did we get here? A perfect storm of the following:

• A pandemic that shut down housing markets across the country and made it impossible for builders to get supplies to build homes.

• This was followed by a remarkable recovery that sharply reduced inventory.

• The supply of existing homes for sale fell to just 1.8 months at the start of 2022, and builders couldn’t build fast enough to keep up with demand.

• Record-low inventories led to sharp price increases.

• Mortgage rates are now 2% higher than at thebeginning of 2022.

• 40-year-high inflation has driven up the cost everything.

• Many Americans can no longer afford to buy a home.

The National Association of Home Builders releases a housing opportunity index each quarter, which measures the percent of homes sold in an area that would be affordable to a family earning the median income. In the second quarter of 2022, that figure fell to just 42.8%—the lowest level since the Great Recession and a steep drop from the 1Q22 level of 56.9%.

Given the unprecedented boom in prices—the median price for existing homes has posted year-over-year increases for the past 125 months—combined with a doubling of mortgage rates since 2021, these reports shouldn’t be much of a surprise.

There is hope for the future, however, and it starts with thelabor market. The U.S. added almost 3.3 million jobs thefirst seven months of 2022, an average of 471,000 per month. Unemployment is near a 50-year low, wages are rising sharply, and there are still over 10 million unfilled jobs out there. This is all good news for demand.

There has also been an increase in the inventory of existing homes for sale. After starting the year at just 1.8 months, supply has increased to 3.0 months. If inventory keeps rising, it will put downward pressure on prices.

Finally, the latest inflation data is giving hope—albeit just a little for now—that the worst of inflation may be behind us. The Fed has promised to keep hiking short-term rates until inflation comes down substantially, but remember that doesn’t equate to similar increases in 30-year mortgages. The mere hope that inflation is coming down can be enough to lower mortgage rates.

To sum up:

• Housing is struggling right now, but a strong labor market will keep demand strong.

• All real estate is local, so don’t expect fire sales in every market.

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