Housing Market
Building permits are declining, while new home sales face high inventory and declining sales, signalling potential price cuts. Builders struggle with high costs, inflation, and stagnant demand.
Building permits have been declining since 2022, though they have consistently remained above the critical 1.4 million threshold. In January, permits were revised down from a modest +0.1% month-over-month increase to a -0.6% decrease, marking two consecutive months of declines. The year-over-year trend also remained negative, with the recent bounce in permits proving to be short-lived. Builders are grappling with a range of challenges, including high material costs, which are still about 40% higher than pre-pandemic levels. These cost pressures, combined with inflation and rising mortgage rates, continue to dampen permit activity and suggest a cautious outlook for the housing market.
New-home sales began the year sluggishly, with a 10.5% MoM decline to 657,000, well below the consensus estimate of 680,000, indicating a stunted recovery. Inventory levels have surged to near 2007 levels, with the current inventory now nine times greater than the average monthly sales, suggesting it would take approximately nine months to sell the current stock at the prevailing sales pace. Despite the sales decline, the median sale price for new homes rose 3.7% YoY, driven by an increase in high-end home sales. The widening gap between rising inventory and declining sales suggests that price adjustments may be imminent. Builders are navigating a challenging environment with stagnant sales and an economic backdrop marked by persistent fiscal deficits, presenting considerable headwinds moving forward.
We do not expect a short-term recovery in the housing market, with a slight recovery likely at the end of the year. Mortgage rates are around 7%, and slower construction will continue to pressure affordability and limit market growth.