- New housing starts have hit a five-year low, while mortgage rates reached another record low last week.
- These two factors could lead to a reduction in the housing supply, which in turn will push up prices.
- As with the financial crisis of 2007-8, the downturn will likely have a long-term negative effect on home building.
Home prices are likely to experience upward pressure later in the year, as U.S. housing market data indicate an approaching drop in supply.
New housing starts fell to their lowest level in five years in April, signaling a coming drop in the housing supply. Meanwhile, fixed mortgage rates have hit an all-time low, indicating that people who take advantage of low rates now will be unwilling to move when fixed rates have risen.
In other words, despite a likely short-term knock on house prices, homebuyers may find that the economic downturn reduces the supply of new homes. And as with the Great Recession, a long-term fall in homebuilding may push prices up in the long term.
New Housing Starts Hit Five-Year Low
The U.S. housing market is sowing the seeds of a future price pump. In April, housebuilding plunged 30.2% to a five-year low. Permits for future construction dived 20.8% to roughly 1 million units.
Both falls mean there will be a reduction in new houses coming on to the housing market. Given that it takes around six months to complete a single-family house, this suggests there will be a significant reduction in new homes for sale from around October.
Because of the compound effect of falling house starts–delayed starts now mean you won’t be able to begin the next batch on time–April’s drop is likely to have longer-term ramifications. The compounded reduction in supply will inevitably push home values higher.
Mortgage Rates Hit Record Lows
Another factor that will push home prices higher is extremely low mortgage rates.
In fact, U.S. mortgage rates have been hitting all-time lows for several weeks now. On April 30, the average for 30-year fixed-rate mortgages hit 3.23%. On May 15, this average dropped to 3.09%. That said, some lenders are pushing as low as 2.75%.
Low mortgage rates are great for anyone lucky enough to be in a position to buy right now. However, for those hoping that the housing market will be more accessible around the time the U.S. economy picks up for them, low rates are bad.
Why? Because those who take advantage of low fixed rates now won’t want to sell when fixed rates are significantly higher. As Meyers Research’s Ali Wolf told Forbes last week:
You’re going to then see a lot less mobility in the housing market.
Residential sales dropped from 741,000 in February to 627,000 in March.⎮ Source: Census Bureau
U.S. Housing Market Won’t Offer Cheaper House Prices
The upshot of all this is that, despite the ongoing recession, the housing market isn’t likely to offer cheaper houses around the time the U.S. economy picks up.
Yes, certain forecasters such as Zillow have predicted a 2-3% fall in house prices this year. Nonetheless, the two factors above may cancel out any fall.
On top of this, the longer-term trend is definitely a more expensive housing market. House prices rose 3.5% annually in February, which was faster than expected. At the same time, homebuilding has been in a weak trend since 2009:
New house permits since Jan 1990.⎮Source: Census Bureau/St. Louis Federal Reserve
So with another Great Recession (or Depression) likely to weaken house building yet again, don’t expect a more accessible housing market.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.