The US Housing Market Is Now Completely Broken

For the first time since the Federal Reserve started raising interest rates, every part of the housing market is now poised to worsen.

The resale market has been slumping since early 2022 as potential sellers sit on their homes rather than give up low mortgage rates. New houses had offered buyers some respite. No more. The recent surge in mortgage rates to as high as 8% has been too much for homebuilders. They will likely reduce construction in the months ahead as profit margins fall. Apartment construction has also rolled over in recent months as developers are hit with a combination of sluggish rent growth and high financing costs.

The frustration among potential homebuyers is well understood. What of the macroeconomic implications? Given the importance of housing to overall activity, subdued residential construction should limit how fast the economy can grow, though not enough to trigger a recession over the next couple of quarters. To the extent that the brutal selloff in Treasuries has been in response to hotter-than-hoped-for economic data, a paralyzed housing sector will offer some respite.

The housing market is responding very differently to the latest run-up in mortgage rates compared with 2022. Then, the strike by home sellers boosted demand for newly constructed houses. Homebuilders became the one bright spot in the market. A lack of inventory kept prices high, allowing companies to use their healthy profit margins to buy down mortgage rates and improve affordability for buyers.

That no longer appears to be the case. Buying down home-loan rates to 5.5% — the magic level for would-be buyers — is a lot easier around 7% than around 8%. Confidence among builders is going the way of their stock prices and profit margins. The National Association of Home Builders/Wells Fargo gauge of sentiment dropped to its lowest level since January this month. We should expect builders to cut back on their production plans going forward.

Weakening Confidence