The U.S. housing market is showing signs of a notable recovery heading into the summer months as homebuilder sentiment improves, the pace of construction accelerates, and market players speculate that Federal Reserve's historic rate-hike cycle might be coming to an end.
Housing starts last month surged to the highest levels in more than a year, according to data published Tuesday by the Commerce Department. Single-home construction rose 21.7% to an annualized rate of 1.631 million units.
Homebuilder sentiment, meanwhile, is nearing levels seen in summer 2022. The National Association of Home Builders/Wells Fargo Housing Market index tracked above the 50-point mark for the first time since July, according to data published Monday.
The Mortgage Bankers Association also noted that applications for new-home purchases were up 8% in May -- and 16.6% compared with last year -- as builders brought new homes onto a market that is still suffering from a dearth of supply.
The new-home-sales segment continues to gather momentum, growing at a pace of 5% from a year earlier, while existing-home sales in recent months continue to see annual declines of more than 20% on a non-seasonally adjusted basis, said the MBA's deputy chief economist, Joel Kan.
"These results were also broadly in line with the Census data showing an uptick in residential housing starts and permitting in recent months.”
Mortgage Rates Moving Slowly Lower
Mortgage rates, too, are slowly starting to ease, with MBA data showing two weeks of declines for 30-year fixed rates -- albeit from the highest levels since 2002 -- to around 6.77%. That's helping loan applications, which were up 7.2% last week, as well as refinancings, which were up 6%.
Last week, homebuilder Lennar (LEN) hit an all-time high after it topped Wall Street forecasts for its second-quarter earnings. The company added that the housing market has "leveled" as buyers adjusted to higher rates.
"Looking ahead, we continue to believe that the market and the economy will remain constructive for homebuilders as pent-up demand continues to come to market and consume affordable offerings," said Lennar Chairman Stuart Miller.
Federal Reserve Chairman Jerome Powell said last week that the central bank was watching the housing market "carefully," given its sensitivity to rate hikes and the five percentage points of increases put in place over the past fifteen months.
"[Housing] is one of the first places that's either helped by low rates or that is held back by higher rates," Powell told reporters in Washington. "And we certainly saw that over the course of the last year. We now see housing putting in a bottom and maybe even moving up a little bit."
CME Group's FedWatch tool, which assigns probability to upcoming rate decisions, sees a 72% chance the Fed next month will add another quarter point to its federal funds rate in Washington. But FedWatch suggests there's a 50/50 chance of a rate cut between now and year's end.
Affordability Stretched, Demand Pinched
Higher mortgage rates have already pinched demand, with existing-home sales falling for a second month in April even as prices rose in nearly half the country's selling regions.
Existing-home sales were down 3.4% in April, suggesting an adjusted annual rate of 4.28 million units, with the average median price down 1.7% from a year earlier to $388,800, according to the National Association of Realtors.
Pending home sales -- a forward-looking indicator of demand based on contract signings -- were down 20.3% from last year's levels in April. That came amid what the group called "affordability challenges" that "continue to hold back contract signings."
Ian Shepherdson of Pantheon Macroeconomics says, however, that the current rebound could face significant summer headwinds, largely as a result of high mortgage rates that are stretching affordability.
"The ongoing bounce in housing starts and new home sales, and the surge in homebuilders’ stock prices, is fueling the emerging narrative in parts of the commentariat that housing is now recovering," Shepherdson said.
"A sustained recovery in housing requires a meaningful improvement in affordability, via lower mortgage rates, or falling home prices, or both. Neither will happen overnight."
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