How unstable is the U.S. housing market at the moment?

Starting in early 2022, the Federal Reserve (the Fed) started a pattern of aggressively raising interest rates; this has significantly affected the U.S. economy, causing a significant downturn and making it much more likely that a recession is coming soon. The U.S. housing market was one of the hardest hit by this tightening of the money supply. In late 2022, monthly prices fell at a rate that hadn't been seen in more than a decade as people stopped buying homes because mortgage costs were increasing quickly. But now that the Fed is slowing down on rate hikes and even left the federal funds rate at 5–2.5% unchanged in June, and home prices and housing starts are rising again, there is more and more proof that the housing market has turned a corner.

Concerns about a possible weakening of the U.S. housing market arose in the last three months of 2022 when the average rate on a 30-year fixed mortgage went above 7 per cent for the first time in more than 20 years, making it hard for consumers and investors to buy homes. Redfin found that investors bought 48.6% fewer homes in the first quarter of 2023 than in the year before; this was the most significant drop on record (since early 2000), and the Seattle-based real estate company said that higher interest rates were the main reason for the decline, along with falling rents and housing values. "Investors have moved towards more affordable properties because housing costs are still high and mortgage rates are going up," said Sheharyar Bokhari, a senior economist at Redfin; this means there are fewer starter homes for first-time buyers to choose from.

The housing supply continues to be constrained, partly because homeowners are reluctant to sell their homes for fear of losing their low-interest mortgages. These homeowners renewed their mortgages during the COVID-19 epidemic when interest rates were at historic lows. "The most surprising thing about this housing market is that the rise in interest rates has had about the same effect on supply and demand," Daryl Fairweather, chief economist at Redfin, told the New York Times. He added that the drop in demand was probably more significant, but the house-building industry is getting a boost from a "dire lack of supply."

However, several pieces of data from the past few weeks show that the U.S. home market is still doing well and may have even started to recover again, which is in line with the Fed's decision to slow down its rate-hiking plan. According to data released on June 27 by the S&P CoreLogic Case-Shiller Home Price Indices, house prices across the country went up by an average of 1.3% in April; this means that prices have gone up for three months in a row after going down for seven months. The 10-city composite index and the 20-city composite index, which measure differences in home prices in 10 and 20 major cities in the United States, increased by 1.7% from one month to the next.

"In April 2023, the U.S. home market kept getting better. Prices for homes reached a high point in June 2022, fell until January 2023, and then started to rise again. The national average increased by 1.3% in April, just like in March. It is now only 2.4% below its peak in June 2022, according to Craig J. Lazzara, managing director at S&P Dow Jones Indices. There are many reasons why home prices are going up again. Before prices were changed for the season, they went up in all 20 towns in April, just like in March. Prices went up in 19 cities in April, up from 14 in March, according to statistics that considered the seasons.

Recent data from the U.S. Department of Commerce showed that sales of new single-family houses in May were at their highest level in almost 18 months; this was also good news for people looking to buy a home. Seasonally adjusted, the number of new homes sold in May was 763,000, 12.2% more than the previous month and 20% more than May 2022. This was the highest level since February 2022 and 20% more than May 2022. And housing starts did well in May, jumping to a seasonally adjusted annual rate of 1.63 million units from a revised-down 1.34 million in April. May's number was the highest since April 2022 and the highest since 2006. The monthly start rise was the most since January 1990, when it was 291,000 units. Also, May's rise of 21.7% was the most significant percentage increase since October 2016. Ben Ayers, a senior economist at Nationwide Economics, said, "Housing starts data tend to be volatile, and this number may be revised in the coming months. However, the size of the increase suggests that builders are generally expanding operations this summer."

Because of this, much of this data shows that house building is again picking up, taking advantage of this year's higher demand and the lack of current homes. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which was released on June 19, showed that builders' confidence in the market for recently built single-family homes went up five points to 55 in June; this is the sixth month in a row that builder confidence has gone up, and it's the first time since July 2022 that mood levels have gone above 50, which means that things are looking up. In a recent interview with the New York Times, Kathy Bostjancic, the chief economist for Nationwide Mutual, said that new housing building "tells us something about where the economy is going." This could mean that things are getting better.

Only some people are sure that this upswing will last for a long time. Thomas Simons, an economist for Jefferies in the U.S., recently wrote, "The strength is so far off trend that it makes me wonder if it can be sustained." He used the Midwest as an example, where the 66 per cent jump in starts was likely due more to rebuilding efforts after the destructive spring tornado season in the region than to a dynamic rise in market sentiment.

Also, house prices are still below where they were a year ago. Redfin's data from June 29 showed that the average U.S. home sold for about $383,000; this is about $4,000 less than the all-time high set in June 2022. Since prices have been going up lately, this discount is the smallest in four months. And in the four weeks before June 25, new ads dropped by a massive 27% compared to last year; this was the most significant drop since the start of the pandemic; this has helped cause a decline of 11% in the number of homes for sale, which Redfin said was the first drop of 10% or more in more than a year.

"Inventory is going down because mortgage rates are high, and many stay put to keep their low rates. Even though the average 30-year mortgage rate has gone down a little bit in the past few weeks, it's still close to 7%, which is more than twice as low as it was in 2021," Redfin said. "High-interest rates are also putting buyers off, but there are still more buyers than owners. The drop in new listings is much more significant than pending sales, down 15%. That means buyers are buying up homes faster than they are being put on the market, which keeps prices high.

So, you can expect house prices to go up even more in the second half of the year. Even though rental costs, not bought-home fees, are included in the calculation of U.S. inflation, the return on rising prices is a good sign of consumer confidence, especially if these positive trends continue for the rest of the year; this could give the Fed another problem when it is trying to slow inflation.

How the Fed decides to move with interest rates could be very important for the future of the home market. If inflation keeps decreasing, there may be no more rate hikes. If that's the case, the U.S. housing market is expected to keep getting better. But if consumer price growth stays above goal rates, the Fed won't hesitate to tighten the money supply even more, and this could keep house prices and buyer demands low for the rest of the year.