This is why we won’t build millions of new homes

We have heard a lot about the need for this millions of new homes during the run-up to the elections, so I can imagine how shocked some people are when they see that today’s report about recession-level housing starts and permits.

Fed Chairman Neel Kashkari of Minneapolis recently declared that the demand for housing is high, so the clearance rate (mortgage interest) should be higher. Since a Fed president is making this claim, it’s worth examining the data closely, as he and his staff should be able to see the same housing data that we all look at.

We have to keep in mind that existing home sales are in their third year in a row of lowest sales ever, when you adjust for workforce size. Meanwhile, when Kashkari made this statement a few days ago, housing starts and permits data were already at early COVID-19 recession levels. Traditionally, when demand is high, home prices should rise and permits should increase, but today we are at recession levels.

The number of new homes and permits has been declining for a while, so Fed staff should be able to pick this up with basic vision skills. Builders pay off mortgage interest as much as possible to move product, so Kashkari’s comments on clearance rates show he doesn’t know what he’s talking about.

The current home starts report shows the same trend we’ve been seeing for a while: builders tend to become more optimistic about building homes as mortgage rates move toward 6%, just as existing home sales data improves. However, they slow down when mortgage rates are between 6.75% and 7.5%. This only applies to permits for single-family homes; Permits for 5 units are already at recession levels and not showing much life at all.

By Census:

Housing begins: The number of private housing starts in October was 1,311,000 on a seasonally adjusted annual basis. This is 3.1 percent (±11.6 percent)* below the revised September estimate of 1,353,000 and 4.0 percent (±9.0 percent)* below the October 2023 figure of 1,365,000.

Construction permits: Private homes granted planning permission in October reached a seasonally adjusted annual figure of 1,416,000. This is 0.6 percent below the revised figure of 1,425,000 in September and 7.7 percent below the figure of 1,534,000 in October 2023.

The graphs below speak louder than any words. It doesn’t look like we’ll be building millions more homes as everyone had hoped. When it comes down to it, the supply and demand model is working and new home sales are currently still below the levels we saw during the 2001 technical recession.

On the positive side, builder confidence improved when mortgage rates fell from 7.5% to 6%. However, rates have since risen again. According to the data, we know that builders have the potential to boost sales by offering lower rates to attract buyers. But the market has only been able to maintain the low rate of 6% for short periods. If we want to see significant growth in housing construction, we need to maintain that level for longer.

Lower interest rates from the Fed could help with land purchases and apartment construction, but that process would take quite some time before we see any development. We are already behind in this regard and if this trend continues we can expect rental inflation to rise.

The main takeaway from the current housing data is that there simply isn’t enough demand to justify additional construction – at least as far as builders are concerned. Builders, as we know, are not charities. I wrote an article in 2021, when many believed a massive construction boom would last a decade. However, I warned that once interest rates rise, we shouldn’t be surprised if the housing market starts to fall. As the Mandalorians always say, “This is the way.”

What can be done about this situation? Unfortunately, not much until mortgage rates fall again and remain low. I’m realistic about how low mortgage rates can go in the current environment, given the expansion of the economy and Federal Reserve policy. However, if mortgage rates were to trend toward 6%, it could at least breathe some life into the data. For the time being, however, we are experiencing a general apathy towards housing construction, which means that millions of homes will remain unbuilt.