Housing Activity Continues to Slow as Economic Growth Declines Abroad

Key Takeaways:

• Industrial production, a gauge of output in the manufacturing, utility, and mining sector, rose 0.4 percent in September. Manufacturing output rose 0.5 percent and reached its highest level since 2008, while mining output increased 0.7 percent but remained below its pre-pandemic level. Utilities output, which is highly dependent on the weather, fell 0.4 percent.
• The Conference Board Leading Economic Index® (LEI) decreased 0.4 percent in September to 115.9. Over the past six-month period, the LEI has declined 2.8 percent.
• Existing home sales declined 1.5 percent to a seasonally adjusted annualized rate (SAAR) of 4.71 million in September, according to the National Association of REALTORS®, the eighth consecutive monthly decline. Over the third quarter, existing sales averaged a SAAR of 4.77 million. The inventory of existing homes for sale declined 2.3 percent to 1.25 million after its summer peak. The months’ supply was flat at 3.2 for the third consecutive month. The median price of existing homes sold, which is not adjusted for home characteristics or location, increased 8.1 percent over the year, a slight deceleration from last month.
• Housing starts declined 8.1 percent in September to a SAAR of 1.44 million, according to the Census Bureau. Over the third quarter, starts averaged a SAAR of 1.46 million units. Single-family starts were down 4.7 percent to a SAAR of 892,000, while the volatile multifamily starts series declined 13.2 percent to a SAAR of 547,000 after a 32.1 percent jump in August. Single-family permits declined 3.1 percent to a SAAR of 872,000, the seventh consecutive monthly decline, while multifamily permits increased 7.8 percent to a SAAR of 692,000.
• The National Association of Home Builders/Wells Fargo Housing Market Index declined 8 points in October to 38, its tenth consecutive monthly decline and the index’s lowest level since 2012, when excluding the COVID shock. The index for single-family sales in the present declined 9 points to 45, indicating that more builders now view current sales as “poor” rather than “good.” The indices for single-family sales in the next six months and traffic of prospective borrowers declined 11 and 6 points to 35 and 25, respectively.

Forecast Impact:

Industrial production growth, especially in the manufacturing component, was more robust than expected in September and supports our forecast for a relatively strong rebound in Q3 GDP growth. Though this could theoretically carry some momentum into Q4 as well, other manufacturing indicators are weakening and economic growth abroad is slowing dramatically, so we expect manufacturing activity in the U.S. to also slow. Further, the continued decline in the LEI remains supportive of our forecast for a recession beginning in the first quarter of 2023.

Housing activity continued to weaken largely in line with our expectations, though existing sales were a touch stronger than anticipated. Admittedly, the trend for existing sales over the past two months has been one of gradual declines rather than the sharp drops we saw earlier in the summer, though these months coincided with when buyers would have locked in mortgages during the moderate rate pullback over the summer. That pullback has since reversed, so we are unlikely to substantially revise our forecast at this time because we continue to view home affordability as worsening. Further, weekly mortgage applications continue to fall and most current homeowners are “locked in” at mortgage rates well below current market rates, resulting in a large financial disincentive to move and take out a new mortgage. On the new home side, the decline in single-family starts matched our forecast and, given mortgage rate dynamics and one of the worst homebuilder surveys in a decade, we anticipate an ongoing drift downward. However, there is growing evidence that builders are beginning to work through their construction backlogs, which may result in builders offering more aggressive incentives to move inventories. If true, this would put further downward pressure on home price growth and would likely cause new home sales in the near-term to be relatively resilient compared to existing home sales.

Nathaniel Drake
Economic and Strategic Research Group
October 21, 2022

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