We got some brutal housing numbers this week with new home construction tumbling 11% on the month. The market had expected it to be flat. Apartments plunged 26% on the month and we're barely over half what they were 3 months ago, so that's about a 40% drop in 3 months. At this point, more units are being completed than started, and we've lost about a 1/3 of house building the entire industry since April of last year, meaning there are going to be a lot of out-of-work construction workers. The one bright spot was permits, which are an indicator of future home building but even there builder sentiment is awful, suggesting that number will be coming down. It may just be a matter of grabbing permits in case they plan to use them, perhaps a speculative gamble on interest rates coming back from the stratosphere. But the background here is mortgages at 7.5% are knocking buyers out. It roughly doubled your mortgage bill compared to three years ago from $1200 a month on the median house to $2600 today. That is a 35-year low in housing affordability. Of course, higher rates mean higher qualifying incomes. So it currently takes over $104,000 in annual salary to qualify for a mortgage right now that is essentially impossible for young families, while the typical family is now spending 28.5% of their income on their mortgage payment, which matches the all-time high. Meanwhile, those same sky-high rates are locking millions of people into homes they can't sell because they'd be trading a 3% mortgage for a 7.5% mortgage that they cannot afford. So owners are sitting on inventory with nobody new coming to buy.
So what's next?
Next is that rising inflation is scaring the FED off rate cuts for the foreseeable future. In fact, we might get another hike or two before they are done potentially bringing mortgages up over 8%. Either way it is looking like years before mortgage rates come back down to normal levels. The freeze will not last forever. Some of those frozen buyers have to sell, maybe they got a new job, or the kids moved out, and they can't afford the big house. Meanwhile, some of those first-time buyers will eventually have to bite the bullet, cut the rest of their spending, and pony up so the kids can actually have a bedroom. But if 7.5% mortgages are the new normal an entire generation of young families will be shut out of home ownership altogether. Which also cuts them off from the cheap money, the cheap loans that the FED uses to drive inflation in the first place. So they'll be paying for the feds money printing at the grocery store, but they won't get the free pump on their house. So all of the pain and none of the gain.
