The amount of new housing starts in the United States increased in May at their highest monthly rate in more than 30 years, but several experts questioned whether the upswing would endure.
“In May, seasonally adjusted private housing starts totaled 1,631,000 yearly. According to a news release from the U.S. Census Bureau dated June 20, this is 21.7% greater than the revised April estimate of 1,340,000. The highest monthly growth since 1990 will occur between April and May 2023, when 291,000 more houses will be started. The growth rate in May, which was 21.7%, was likewise the highest monthly growth rate since October 2016.
In terms of region, the Midwest saw the largest increase in house starts, up 66.9 percent from April to May. While the West had a gain of 16.4%, the South witnessed an increase of 20.3%. In the Northeast, housing starts decreased by 18.7 percent on a monthly basis.
Some experts view the increase in home starts as a sign of a strengthening market. Thomas Simons, a U.S. economist with Jefferies, disagrees. According to Reuters, he stated in a note that the strength was “so far off trend that it calls sustainability into question.”
Simons noted that the rebuilding efforts in the Midwest following a catastrophic tornado season in the spring might cause the 67 percent increase there. Such efforts won’t likely be made again, he said.
Existing home sales decline as mortgage applications rises
Mortgage Bankers Association (MBA) figures show that an increase in mortgage applications also accompanied the boost in house starts. In May 2023, mortgage applications increased by 8% from the previous month and by 16.6% from the previous year, according to a statement on June 20.
Kan said that existing-home sales have continued to experience annual reductions of more than 20% on a non-seasonally adjusted basis in recent months, despite the new home sales segment continuing to increase at a rate of 5% compared to a year earlier.
The rising mortgage rates are to blame for the fall in existing-home sales. According to data from Freddie Mac, a 30-year fixed-rate mortgage had an interest rate of 6.69 percent as of June 15, up from 2.93 percent two years prior.
91.8 percent of American homeowners have mortgages with interest rates below 6 percent, 82.4 percent have rates under 5 percent, 62 percent have rates below 4 percent, and 23.5 percent have rates under 3 percent, according to a real estate firm Redfin news release dated June 14.
Builders Receives a Boost Confidence
Additionally, the trust of builders has grown. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) indicates that builder confidence in the market for newly-built single-family homes improved five points to 44 in June, marking the sixth month that the index has increased consequtively.
Additionally, this marks the first time since July of last year that the sentiment index has risen above 50. However, NAHB chairman Alicia Huey believes that increasing builder confidence may lead to less housing market supply.
In June, builders continued to provide sales incentives. Fifty-six percent of builders offered incentives, while 25 percent lowered home prices to increase sales.
The housing market helped the US dodge a bullet
Sonu Varghese, a global macro strategist at Carson Group, believes that the U.S. economy may have avoided a recession given the recent momentum in the housing sector.
In a note published on Wednesday, he emphasized the positive housing start figures, which increased by 21.7% in May to 1.63 million units, marking the largest percentage increase in three decades. This is significant since recessions are generally predicted by weak, not strong, housing start data.
Sales of new homes, purchases of household goods, and spending on appliances precede the groundbreaking of a foundation, measured by housing starts. It reveals a lot about the attitude of home builders, which has improved since the year began.
Even though mortgage rates increased last year, which caused a decline in home starts, the recent return indicates that the likelihood of a recession has greatly lessened, especially compared to analyst projections.
Varghese concludes that the economy is neither in a recession nor on the verge of entering one due to the recent strength in housing market data. The data also indicates that the U.S. economy is either in a timely cycle or is about to enter a recession within the next six months.
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He is also confident that the U.S. economy avoided a recession and is likely still expanding due to the persistence of strong consumer spending, rising real incomes despite falling inflation, the likely end of Fed interest rate hikes, easing supply chain disruptions, and an uptick in manufacturing activity.
Reference: Housing Starts See Biggest Monthly Gain Since 1990, but Trend Unsustainable
