Cut in demand by US builders likely to bring housing market back into balance

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Supply chains are finally catching up to demand, largely because higher mortgage rates are making buyers more skittish and damping sales

From stagflation to cost relief in six months — that’s the new picture of the housing market that has emerged in just the last few weeks. And to the extent housing has been a microcosm for the pandemic-era economy, the cooldown will present new challenges and opportunities over the next six months for both sellers and buyers. It should also provide some broader reassurance: it’s looking possible that we can unwind some of the explosion in housing unaffordability without crashing the market.

Today, the story has changed. Supply chains are finally catching up to demand, in large part because higher mortgage rates are making buyers more skittish and damping sales. At the same time, home builders are now in a position to use some of the cushion from record-high profit margins to offer incentives to buyers, improving the affordability picture for potential homeowners.

The first sign that relentless cost inflation was shifting was the drop in single-family housing starts over the past two months. Between April and June, single-family starts fell by 16%, and they are now at the lowest level they have been in two years. For an industry that’s been dealing with rampant cost inflation due to supply constraints, a reduction in demand from home builders is the quickest way to bring the market back into balance. Lumber has been a well-publicised source of higher costs, and lumber futures have fallen in price by almost 60% since early March, which will provide builders with some relief over the next couple quarters.

 

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