Housing Activity Dips as Mortgage Rates Rise, but Full Effect Yet to Be Seen

Key Takeaways:

• Industrial production, a gauge of output in the manufacturing, utility, and mining sector, rose 0.9 percent in March, according to the Federal Reserve Board. Manufacturing output rose 0.9 percent on the back of a 7.8 percent jump in motor vehicle and parts production, which reached its highest level since January 2021. Mining output was up 1.7 percent as energy prices rose, while utilities output increased 0.4 percent.
• Existing home sales declined 2.7 percent in March to a seasonally adjusted annualized rate (SAAR) of 5.8 million, the second consecutive monthly decline and the lowest level since June 2020, according to the National Association of REALTORS®. The number of homes on the market increased a non-seasonally adjusted 11.8 percent to 950,000, causing the months’ supply to move up three-tenths to 2.0. The median sales price increased 15.2 percent from a year ago, a deceleration of one percentage point.
• Housing starts increased 0.3 percent in March to a SAAR of 1.8 million, the highest level since 2006. Single-family starts declined 1.7 percent to a SAAR of 1.2 million while multifamily starts continued a hot streak, rising 4.6 percent to a SAAR of 593,000, just shy of the recent peak in January 2020. Single-family permits were down 4.8 percent to a SAAR of 1.1 million while multifamily permits were up 10.0 percent to a SAAR of 726,000.
• The National Association of Home Builders/Wells Fargo Housing Market Index declined 2 points to 77 in April, its fourth consecutive monthly decline. The headline decline was driven primarily by a 6-point drop in the index charting traffic of prospective buyers, which, at 60, reached its lowest level since August 2021. The index for single-family sales in the present declined 2 points to 85 while the index for single-family sales in the next six months partially recovered from a 10-point drop last month, rising 3 points to 73.

Forecast Impact:

Manufacturing activity is a bright spot in our near-term outlook, but with global policy tightening, likely disruptions stemming from lockdowns in China, and current capacity utilization at its highest level since 2007, we expect this level of output may not be sustainable. Still, the rebound in auto manufacturing is encouraging after two months of weak sales numbers. If sustained, increased auto production will be supportive of our inflation forecast that includes declining prices for new and used autos as the year unfolds. Further, mining output is likely to remain strong as global demand for U.S. oil and natural gas is likely to persist after the disruption to both markets following the Russian invasion of Ukraine.

The March decline in existing home sales was largely in line with our expectations. We believe the red-hot housing market, which was spurred first by the COVID-induced surge in demand (combined with flush household balance sheets from transfer payments and historically low interest rates), and second by a rush to lock in lower mortgage rates around the turn of the year has peaked. Especially given that the full effects of the recent rise in mortgage rates has yet to be felt,  we expect existing home sales to continue to decline through 2022. However, we believe there is still a pool of prospective buyers who were previously outbid but still want to purchase a home, which should help support sales, thus limiting the pace of slowdown in the near term. A similar dynamic is true for new housing construction, as builders continue to report throttling sales due to supply chain and skilled labor issues limiting construction relative to demand. New home sales are therefore expected to remain comparatively strong in the short term. Single-family housing starts were almost exactly in line with our forecast, though multifamily construction continues to outperform even our upwardly revised expectations and will likely lead to another near-term upward revision. We think starts also likely peaked in Q1 but will remain elevated due partially to the aforementioned pool of prospective buyers and throttling of sales to date.  This is also coupled with approximately a decade of underbuilding relative to demographic trends, which should support a need for more housing construction. This is consistent with the April NAHB survey, which, although trending down, remains 11 points higher than its 2019 average.

Nathaniel Drake
Economic and Strategic Research Group
April 22, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management. .