The Fed needs a housing comeback

One important data line The path to a recession is marked by the loss of workers in the housing construction industry. The number of workers building and remodeling single-family and multi-family homes tends to decline before each recession as higher interest rates are negative. influence the economy through housing.

Although the unemployment rate has risen recently, claims for unemployment benefits have yet to rise to a level that would justify a recession with job losses. But one employment sector in particular could potentially push unemployment claims higher, pushing the unemployment rate to 5% or higher.

Today, homebuilding activity is at the levels we saw during the brief pandemic-induced recession of 2020. Also this week The home depot warned that slows down job creation. The trend here is clear and has been going on for many months. A while back, HousingWire Editor-in-chief Sarah Wheeler and me talked about the risk of a recession due to a lack of construction labor.

Let’s take a look at today’s housing report and see where we stand.

From the US Census Bureau:

Construction permits

Private homes granted planning permission in July reached a seasonally adjusted annual figure of 1,396,000. This is 4.0 percent below the revised figure of 1,454,000 in June and 7.0 percent below the figure of 1,501,000 in July 2023.

Housing begins

Private housing starts in July reached a seasonally adjusted annualized rate of 1,238,000. This is 6.8 percent (±10.3 percent) below the June 2023 revised estimate of 1,329,000 and 16.0 percent (±10.5 percent) below the July 2023 figure of 1,473,000.

I want to make this article very simple to understand. If you look at the charts below, we are actually at recession levels right now. But throughout this entire time, the number of housing construction workers has grown. Why does this happen?

A few reasons have made this economic cycle unique and have driven recession callers crazy since 2022.

1. We have a large backlog of housing orders in this cycle.

2. It takes an average of 21 months to complete a five-unit project. That’s a long lead time to start and complete a project, which kept people working longer than usual.

3. Large publicly traded homebuilders have gross profit margins of more than 20%, meaning they can lower mortgage rates to sell homes.

4. New listings data has been at an all-time low in recent years. Many people who have renovated their homes continue to live there longer.

5. There are many new homes that have been licensed but have yet to start as builders anticipate higher rates. They become more positive as interest rates fall, keeping the labor supply high for this recovery in demand.

Things have changed lately. Home construction data is at recession levels, single-family permits continue to decline and remodeling activity is slowing. As more units are completed, and unless more starts occur, we move closer to not achieving such high employment levels for construction workers.

Conclusion

In order for mortgage interest rates for single-family homes to rise again, we need lower mortgage interest rates. With interest rates having fallen steadily since June, we have seen a slight improvement in forward-looking homebuilder sentiment survey data.

But to get things moving again and keep people in work, we need lower rates for a longer period of time and a return to the world of 7 to 8 percent rates. These do not do the smaller builders any favors.

It’s a little more complicated for the multifamily construction world (5+ units), because their financing isn’t as directly tied to 30-year mortgage rates, and rental growth for apartments is cooling down. In places like Texas and Florida, where inventories are growing faster than the rest of the country, we are seeing more weakness there than in other locations.

So if the Federal Reserve If it wants to prevent claims for unemployment benefits from rising and unemployment from rising due to job losses, it will have to get housing back. The existing home sales market has been in recession since June 2022, but the new construction sector is not.