Weak May Housing Data

Earlier this week, we highlighted the fact that mortgage activity had fallen off a cliff due to a historic rise in rates. This is an important factor to keep in mind as the housing market tends to be a strong leading indicator for recessions, as every recession besides the COVID crash since the early 1960s has been preceded by a pronounced decline in Housing Starts. Although the NAHB index has already rolled over substantially, Housing Starts and Building Permits are yet to drop on a trailing twelve-month basis. However, the data has been showing signs of weakness, as we have now seen two consecutive months of declines in permits and a significant month-over-month fall in starts.

The table below breaks down this month’s report by type of unit and region and shows both the month-over-month and year-over-year changes. Contrary to what we saw last month, Housing Starts moved higher in the Northeast and Midwest on a m/m basis, while the South and West saw dramatic declines. On a y/y basis, only the Northeast (smallest of the four regions) saw starts move higher. In aggregate, Housing Starts fell by 14.4% month over month and 3.5% year over year. Although multi-units fell more than single units, the decline was substantial for both. In terms of permits, there was no positivity in sight, as every region saw m/m declines. This is not a positive sign for future starts data, as permits must be issued before starts can occur. In aggregate, Building Permits fell by 7.0% month over month, driven by a massive decline in the Northeast.

Housing Starts and Building Permits

For the first time since February of 2021, the 12-month average of Housing Starts declined on a m/m basis. A rollover in this figure tends to be a strong recession indicator, which based on prior history would suggest that the economy is not yet in a recession. If this data continues to weaken, though. recession alarms will start ringing.

Housing Starts

The charts below show the rolling 12-month average for Housing Starts and Building Permits since 2010 on both an overall basis (top chart) and for single-family units specifically (bottom chart). Overall, the 12-month average for headline starts and permits has experienced headwinds as of late with the rate of increase for both slowing down and starts actually showing a slight decline.  The trend for single-family units, however, is much more divergent as permits have already started to roll over after peaking last summer while single-family starts have essentially leveled off during that same span. . Click here to become a Bespoke premium member today!

Housing starts and building permits

Single Family Starts and Permits

Are The Best Days Behind for Mortgage Activity?

US Treasury yields have continued to move higher with mortgage rates rising in tow (we explained some key distinguishing characteristics of mortgages versus Treasuries in last night’s Closer).  Bankrate.com’s national average for a 30-year fixed rate mortgage has now eclipsed 5.25% in the past week which is an over 2 percentage point increase year over year.  Since the start of this series on mortgage rates going back to the late 1990s, that is by far the largest year-over-year increase on record.

Average mortgage rates

Higher rates mean less attractive affordability so purchase applications have continued to fall per the latest Mortgage Bankers Association data.  Seasonally adjusted purchase applications dropped 3% this week and are hovering just above the February lows.

Mortgage Purchase Index

The spring is often the hottest time of the year for housing activity.  As shown below, the few weeks surrounding the current one have often marked the annual high (blue dots in chart below) in non-seasonally adjusted purchase applications over the past decade.  This year that might not be the case.  Activity has been running below that of the prior year and has plateaued more recently as mortgage rates have taken off. At the moment, this year’s high was set a little over a month ago in the second week of March. While a new high for the year is still within tangible reach from current levels—meaning upcoming weeks could still very well experience an uptick to a new high—this year has the potential to see a much earlier than usual high in mortgage purchases.

MBA Mortgage Purchases

Refinance applications meanwhile are far weaker with unrelenting declines recently.  This week marked the sixth week over week decline in a row leaving the MBA’s refinance index at the lowest level since February 2019.  Click here to learn more about Bespoke’s premium stock market research service.

Mortgage Refinance Index