Homebuilders shuttin er down!

A Building Problem for America’s Housing Market

Home builders are pulling back. Over the long haul that will only exacerbate America's housing problem.

Construction was started on 1.439 million homes last month, at a seasonally adjusted, annual rate, down 7.7% from a year earlier.

By Justin Lahart, WSJ

Oct. 19, 2022 11:50 am ET

It is harder to build it when you aren’t so sure they will come.

And so, American home builders have decided to slow down. The Commerce Department on Wednesday reported that construction was started on 1.439 million homes last month, at a seasonally adjusted, annual rate, down 7.7% from a year earlier. Exclude starts on multifamily dwellings, which can be volatile from month to month, and the decline was even more severe. Single-family starts, at an annualized 892,000 homes, were down 18.5% from a year earlier.

Hang it on the surge in mortgage rates, which is putting severe constraints on housing affordability. With the rate on a 30-year fixed mortgage averaging 6.1% last month according to Freddie Mac, compared with 2.9% a year earlier, monthly payments on the same size loan would be more than 40% higher. And with Freddie Mac’s latest reading on mortgage rates at 6.9%, the crunch is now even worse.

There is a chance that builders’ ability to sell homes might not be as limited as the rise in mortgage rates seems to imply. The job market continues to do well, allowing more people to form new households. America’s protracted housing shortage—Freddie Mac estimated that as of the end of 2020 the country was 3.8 million housing units short of what it needed—suggests there is plenty of work for builders to do.

The stock market doesn’t think so, though: A popular home builders exchange-traded fund, which had done twice as well as the broad market from 2020 through 2021, is down by about 35% year-to-date.

And why risk it? The Federal Reserve is aiming to cool the job market as part of its effort to tame inflation, and the risk is that it ends up only doing the job too well, sparking a wave of layoffs. Investors are clearly worried.

Moreover, builders have plenty of homes already in the pipeline: Wednesday’s report showed there were a seasonally-adjusted 800,000 single-family homes under construction last month, which compared with 531,000 in February 2020, the month before the pandemic took hold.

The danger is that over the long haul, builders’ pulling back only exacerbates the home shortage. In the end, that might only put upward pressure on prices, rents and, ultimately, inflation. The sad irony is that rather than fixing America’s housing problems, the Fed’s actions might only make them worse.