U.S. Economic Brief || Housing market indicators broadly soften in April

Housing market indicators broadly soften in April

*The spike in mortgage rates and rapidly tightening financial conditions are beginning to bite into the housing market. A raft of housing market data from April are pointing to slowing demand from homebuyers in the face of elevated prices and sharply higher financing costs, deteriorating home builder sentiment, and moderating home sales.

*Existing home sales declined for the third consecutive month to 5.6m annualized in April, the lowest level since June 2020 (Chart 1). The moderation in sales was concentrated in the South and West, which saw sales decline 120k and 70k, respectively, while sales increased in the Northeast and Midwest. The decline in existing home sales is reflected in the sharp decline in mortgage applications for purchase, which have fallen 25% in the last four months. The median existing home sales price gapped up to $390k, and while we expect the pace of home appreciation to cool considerably, outright declines at the national level appear unlikely.

*Housing demand continues to be supported by favorable demographic and mobility trends, while supply remains constrained. The inventory of unsold existing homes ticked up to 1m, lifting the months supply of existing homes to 2.2 months, a notable improvement from January’s 1.6 months but still well below the 2019 average of 3.9 months (Chart 2). Amid limited supply, competition among home buyers remains fierce, although anecdotal evidence suggests this is beginning to moderate. High frequency data from Redfin indicates the median days on market continued to decline through April, falling from 18 days in the first week of April to 15 days by the end of the month. On a seasonally-adjusted basis, the average sale to list price edged up to 102.7% in March (Chart 3), a gauge that is likely to ease as housing demand wanes.

*Housing starts held steady at 1.7m annualized in April, following a significant downward revision to starts in March, with the data reinforcing the trend of diverging activity in the single vs. multifamily markets. Single family starts fell 90k annualized, and are just 100k above their pre-pandemic level while multifamily starts increased 80k annualized, and have been trending up. Starts have been constrained by labor and material shortages throughout the pandemic, as has building activity more generally. The number of housing units under construction has soared to 1.6m, a 35% increase relative to February 2020 (Chart 5). Some builders have shifted focus to catching up on their backlogs of units under construction, which has likely weighed on starts.

*Building permit issuance moderated in April but remains above pre-pandemic levels. Single family permits edged down to 1.1m and multifamily permits inched down 7k to 709k annualized (Chart 6). Against the backdrop of sharp increases in 30-year fixed mortgage rates, which have increased by 200+ basis points since January, and soaring construction costs, which are up 19% yr/yr, home builder sentiment has worsened markedly as they face increased difficulty passing on higher costs to home buyers. The National Association of Home Builders’ (NAHB) Housing Market Index plummeted 8pt in April to 69, the lowest level since June 2020 (Chart 7).

*The NAHB’s index of expectations for new single-family home sales in the next six months fell to 63, the fifth consecutive monthly decline, while the traffic of prospective home buyers index fell to 52, the lowest level since June 2020. That home buyer traffic has declined so precipitously is striking given the index’s elevated levels during the height of the pandemic, and is consistent with results from Fannie Mae’s National Housing Survey indicating a record 76% of respondents believe now is a bad time to buy a home. (Chart 8).

Chart 1. Existing Home Sales (SAAR)

Chart 2. Months’ Supply of Existing Homes

Chart 3. Median Days on Market and Average Sale to List

Chart 4. Single Family and Multifamily Housing Starts

Chart 5. Housing Units Under Construction

Chart 6. Single family and Multifamily Building Permits

Chart 7. NAHB Housing Market Index and Construction Cost Index (yr/yr, %)

Chart 8. Traffic of Prospective New Home Buyers and % Who Say it’s a Bad Time to Buy

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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