The house at the fork in the road
Homebuilding stocks are rising, and the housing market may be springing back too.
Published October 1 2024
The US housing market has been frozen in place for months, with high rates keeping owners from moving and renters from buying. The Federal Reserve has begun to cut rates, but that simply puts a bow on a change in mortgage rates that was already underway.
An August report from the Federal Housing Finance Agency finds that high mortgages and their “lock-in effect” have prevented the sale of about 1.7 million homes between the second quarter of 2022 and the second quarter of 2024.
Mortgage rates have already retreated substantially, with 30-year fixed-rate loans going from 7.22% in May to 6.08% today. With mortgage spreads to Treasuries approximately 1.2% higher than the pre-Covid average, further rate improvement can be expected should yield curves continue to normalize and bond-market volatility settle down.
If rates continue to come down, homes should become more affordable without home prices necessarily coming down. (The S&P CoreLogic Case-Shiller National Home Price Index is currently at an all-time high.) A Pew Trust report from last year cited claims that the US is short anywhere from four to seven million homes. In other words, demand is there but supply is not, which underscores that improving affordability is likely to be a long-term project.
Single-family housing starts plunged at the outset of Covid before swiftly rebounding. Starts then fell again in 2022 as mortgage rates spiked in conjunction with the initiation of the Fed’s hiking cycle. They began falling again this February and have not stopped declining. It would seem—and we’ll soon enough know if this is right—that housing starts might rise again now that mortgage rates are lower.
Equity prices, which are forward-looking by nature, are already booming for the homebuilders. Further, the broader Real-Estate sector, which lags the overall market year to date, has been the best-performing sector in the S&P 500 over the last three months reflecting the anticipated benefits of lower interest rates.
“Housing IS the business cycle,” said economist Edward Leamer in 2007. Indeed, if the residential housing market can be restarted by lower rates, it is likely that other sectors of the economy will benefit as well. New homeowners, after all, want snowblowers, lawnmowers, sheds, etc. They upgrade their furniture and update the décor. If they’ve moved to a different part of the country, they may need a new car or even new clothes.
Assuming no recession in the near future—and our macroeconomic committee does not currently expect one—the rise in housing market activity may lead to benefits that ripple through the larger economy, further supporting economic growth.