Source: Seeking Alpha —
Summary
- The main determinants of housing demand in the short run are the level and direction of mortgage rates and the strength of the job market.
- Homebuilders have responded to the drop in new home sales by reducing housing starts, and this response is likely to continue this year, until new home sales finally rebound.
- The housing market – and the overall economy – will be healthier over the long run if house price appreciation moves closer to increases in personal income.
In last week’s discussion, we looked at last year’s performance of the US housing market and the forces that shaped that performance. This week, we look at the forces that should shape the housing market for this year and what they imply for sales, starts, prices, etc.
The main determinants of housing demand in the short run are the level and direction of mortgage rates and the strength of the job market. Over the longer term, demographics play a major role; but they tend not to change much from year to year and so won’t be a part of the discussion for housing demand this year.
The job market has been remarkably strong in the recovery from the Covid shutdowns, with nonfarm payroll changes averaging gains of 726,000 per month since they bottomed in April 2020. Even over the past six months, the increases have averaged 307,000 – well over the long-run median gain of nearly 190,000 per month. While the strong job market (combined with the unusual work location changes brought on by Covid) has played a significant supporting role for housing demand over the past 30+ months, job gains are inexorably slowing and will offer less support going forward – even if the economy can avoid a recession. But if a recession occurs at some point this year, job growth will turn negative (even in a modest downturn), and the job market will dampen housing demand.
