Update on Housing Market
Today’s market weakness shares little in common with conditions during 2007-2008, when a housing bubble fueled by weak lending standards and massive speculation nearly brought down the financial system.
While housing prices have soared and bubble talk abounds, bank capital standards are much stronger today and lending standards have tightened considerably since the housing bust. Moreover, the problem isn’t too many homes. It’s just the opposite: too few homes in too many locales.
The Covid-19 pandemic profoundly altered the U.S. housing market. Homeowners and renters reevaluated their housing needs as they spent more time at home. At the same time, remote work set off a great migration as employees decided where they wanted to live based on lifestyle rather than employer location. The two themes created a perfect storm of housing demand and overwhelmed homebuilders.
The annualized pace of housing starts and building permits steadily climbed after initially plunging during the depths of Covid-19. Housing starts and building permits each jumped to their 2006 highs, levels set during the last housing cycle boom in the lead-up to the 2008 financial crisis. Home and building material prices skyrocketed as housing demand outpaced supply.
Recent datapoints indicate the housing market is cooling. The pace of housing starts and building permits declined during the first half of 2022, and data recently released by Redfin appears to confirm this slowdown. The real estate brokerage reported approximately 60,000 home purchase agreements fell through during June, representing 14.9% of homes that went under contract. Based on Redfin’s analysis, it was the highest percentage on record except for March and April 2020.
The ongoing housing market slowdown indicates the Federal Reserve’s interest rate increases are already impacting the economy. Keep in mind, this is part of the Fed’s plan – to ease inflationary pressures by reducing demand for goods and services.
However, the Fed’s actions are blunt and may start to impact more segments of the economy, such as manufacturing and retail sales. If you have read about rising recession fears, this is one of the catalysts behind the fears. Investors are concerned the Fed is too focused on inflation and will raise interest rates too fast and too high, slamming the brakes on the U.S. economy and starting a recession.
Thanks, and have a great week,
Dennis P. Barba, Jr., Ph.D.
CEO & Managing Partner
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. CAR-0722-03327
