2022 Theme - US Housing Update: What Demand Destruction Looks Like

It has been over 2 months since we wrote on one of the most interesting and important sectors of the US economy: housing.

In PN 49 we argued that a declining housing market was hardly a stunning development and could be an overall positive. Lower house prices would help cool the economy and also make homes more affordable for the many Americans struggling to afford either to buy a home or the ever increasing cost of rent.

We wrote then that:

Home prices coming back to earth .... could be a great thing. If you expect 30%+ increases in house prices every year then you are either greedy or crazy or both.

At the time, we were pushing back on some rather hyperbolic talk that the housing market was on the precipice of crashing, with some commentators even likening it to 2008.

Fast forward a few months and then evidence of a slowing housing market has only deepened and the extreme talk has also intensified. These Cassandras must not read Pebble (!) and they also seem to have an almost fanatical devotion to a housing crash.

Perhaps those not yet on the housing ladder can be forgiven for fervently hoping that the price of shelter plummets but their fervor doesn't make it more likely nor is their doom mongering sensible. 2008 and its aftermath was terrible for many, many people with a high correlation between that terribleness and those lower down the socio-economic ladder.

Let us all try and stay on an even keel and explore whether the case for a housing market downturn is in the offing.

As we have stated a few times this year: a rapidly cooling housing market is hardly a shocking development: rapidly higher mortgage rates, rising prices and strong housing demand were probably not going to coexist for too long.

And they haven't!

The most notable and discussed stat might be the fact that more and more home sellers are having to slash their listing price.

This number is:

a) rising quickly and

b) far above recent annual trends.

Zillow published a recent report that noted that slowly but surely the percentage of homes that are selling above their listing price is beginning to come down from all time highs.

See here:

House prices are still really high. In fact, despite the price cuts above, they are still rising! The median existing-home price of all housing types jumped to $416K in June, from $407K in May (and up tremendously from $285K just two years ago).

That may begin to change: the number of mortgage applications are also falling which suggests that many people continue to struggle to be able to afford the current reality of slightly less expensive homes and very expensive credit.

Obviously, this tough outlook is feeding into home sales.

According to the National Association of Realtors, sales of previously owned homes fell 5.4% in June to 5.12 million units compared to May and were 14.2% lower when compared to the same month last year.

What does this all mean?

It means generally that what we suggested previously is still unfolding. The fact that mortgage+house prices costs together are up 60%+ over the last year has - unsurprisingly - had a profound impact on the housing market.

That could still be a good thing - for the economy and for future home buyers. It does not necessarily herald a housing crisis as we will detail below.

It might no longer be boom times for home sellers but unless they are trying to flip a recently purchased home, they can hardly be too disappointed. It has been a stellar decade for housing.

  • There is a negative element to the housing market slowdown however. We didn't have to look too hard but we found one and, amusingly, it isn't much discussed by the housing bears.

It is the fact that housing starts are also falling. Single-family housing starts were at a two year low in June, down nearly 8% for the month and about 16% lower over the last year.

Here is the chart of the decline in US housing starts.

These are now at a 14-month low and have fallen 20% since February.

The timing of this is pretty unfortunate. Right as inflation in materials and supply chain snarls begin to ebb, the number of houses being built is shrinking. Fears around mortgage rates and, increasingly, broader economic growth mean that builders are becoming gun shy about starting more projects.

Yes, it is true that lower mortgage rates might help some buyers but what would really help the many millions of Americans trying to get on the housing ladder would be more new homes to buy.

The irony of the present situation is striking. It also risks becoming a self-fulfilling prophecy: houses will stay expensive because during the boom times we can't build enough and during the downturns we won't build.

As we have detailed several times in some depth. The single biggest reason for expensive housing in the US at present is a lack of available supply. We have - for well over a decade - under built and therefore under supplied the market.

  • You can find some of our previous work on the subject of low housing supply here and here.

And now that the housing market is cooling and also some of the other issues are clearing up we are not making use of the opportunity to fill the gap. In fact we are doing the very opposite.

Perhaps rather than fretting about another housing crash, commentators and Cassandras should spend a bit more time on the lack of homes for aspiring American homeowners.

The US housing pipeline isn't the only thing running dry at present either.


Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.


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