Full article here, I’ll leave […] to indicate where I’m leaving things out: https://www.housingwire.com/articles/homebuilders-are-done-until-mortgage-rates-fall/

Homebuilders are done until mortgage rates fall

Why construction on single-family houses is on hold

Tuesday’s housing starts report clearly shows that homebuilders are going to be done with single-family construction until mortgage rates fall. Housing completion data is still struggling to get some traction, but in the coming months, builders should be able to get more housing completions done while housing permits and starts for single-family homes are in decline. If it wasn’t for solid rental demand boosting multifamily construction this year — 18% year to date —this data line would have looked much worse.

From Census:

Privately‐owned housing starts in July were at a seasonally adjusted annual rate of 1,446,000. This is 9.6 percent (±8.6 percent) below the revised June estimate of 1,599,000 and is 8.1 percent (±11.9 percent)* below the July 2021 rate of 1,573,000. Single‐family housing starts in July were at a rate of 916,000; this is 10.1 percent (±10.8 percent)* below the revised June figure of 1,019,000. The July rate for units in buildings with five units or more was 514,000.

[…]

Currently, we are in a much different housing recession than what we had from 2005-2011. The credit cycle looks much different now than the build-up from 2002-2005.

[chart]

Why do I call it a housing recession? A recession is when total activity falls to a point where production reverses and jobs are lost. For now, the homebuilders will keep labor because they need to finish the homes they have in the pipeline. However, as new home sales have fallen, the future growth in construction is done until the builders feel comfortable building more single-family starts.

As we can see below, single-family starts are falling more noticeably than total housing starts, which is still being boosted by rental demand.

[chart]

Total activity in the existing home sales marketplace is falling, which means less commission transfer in that sector. Loan originations are falling amid less demand from refinancing and purchase loans, which means jobs are lost in the mortgage industry. That aspect differs from the new home sales selector, which drives housing construction, construction jobs, and big-ticket purchases for those new homes. The recent decline in copper prices is very telling; even with a recent rebound in prices, things are slowing down on the housing construction side.

[chart]

In March I wrote that the new home sales sector was at risk once the 10-year yield broke over 1.94%. Currently, the 10-year yield is at 2.81%, and mortgage rates above 5% have impacted this sector more significantly than the existing home sales market.

[chart]

[…] We can see that the builder’s confidence data has collapsed recently, going below 50 for the first time in a while, with the last print being at 49. […]

In 2018, when mortgage rates rose to 5%, the builders paused construction for 30 months; they were mindful of supply in the new home sales sector. We have 9.3 months of supply but of that number, 6.22 months of supply is under construction and 2.24 months of supply hasn’t even been started yet.

[…]

The housing construction data looks right to me; the downtrend in activity in permits and starts should still be with us for some time. The homebuilders don’t build for charity — they’re here to make money. Also, they are facing more competitive inventory since the number of existing homes is increasing, and those are cheaper. So, they will take their time to build the homes already under construction and those homes they haven’t started on yet.

When mortgage rates fall, the narrative can change, but we aren’t there yet. Solid rental demand is keeping the multifamily construction going, but the weakness in single-family starts is here to stay; expect single-family starts to have their first decline since 2011.


end of article

New buildings don’t go up in a week. They’re doing that based on demand shift being away from homeownership, towards renting. It takes time for builders to build those multifamily apartment buildings. During that lag time (of unmet demand), the next couple years, we should expect to see rents outpace both inflation and SFR appreciation. They’re building those apartments because, due to being scared of high rates, far fewer renters are departing the rent treadmill, meanwhile other people are still aging out of mom’s basement and need to rent their first apartment, they will soon be crowding around that treadmill, trying to squeeze in, while the person on it is scared to get off. And we know how that ends… blind bidding wars (not unlike the home purchase blind bidding wars in late 2020 and throughout 2021) for apartments is coming soon, to a major city near you (you know, where the jobs are located), if it’s not there yet.

“Hi Tenant Applicant 1143, thanks your interest, and we appreciate you meeting our minimum FICO score threshold of 760, as well as paying the $50 credit check deposit. Due to all the interest in unit #115 of The Sparkly Commons, and some applicants offering more than asking rent, we’re giving you a final opportunity to state how much you’re willing to pay in rent to sign this 12 month lease. Reminder that the security deposit is 3 month’s rent, ensure you plan for that when submitting your rent offer, since offering to pay more in rent will also increase the required security deposit. The deadline for your response is Monday, and we will not be able to answer any clarifying questions before then. Please click this link to enter how much you are willing to pay to rent unit #115 of The Sparkly Commons, whomever is selected will have an opportunity to review the terms of the lease, and sign it, at that point.”

The folks ordering the construction of apartment buildings instead of homes are not stupid, they see where the wind is blowing, where things are likely to go up the fastest, where it will be raining and where it will not be raining, relative to today. Q4 2021 saw the largest percentage of 1-4 unit homes purchased by investors than ever before, at the time the writing was on the wall that 1) rates were going up, and 2) inflation was about to hit, 3) the stock market may be about to go down, and 3) real estate is a great inflation hedge. These people, too, were not being stupid.

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