Fading Housing Demand Poses a Danger to Economic Conditions

“Despite copious media stories of a general lack of housing supply and never-ending home price gains, we instead see renewed signs of fading housing demand that have homebuilders increasingly pulling back on their current and future building plans,” wrote Scott Anderson, chief U.S. economist of BMO Economics.

April single-family home sales were down 7.7% year-over-year, with the drop looking “sustained and not a one-off event as a clear downtrend in housing demand appears to be re-establishing itself.”

The National Association of Home Builders said that housing starts were down 5.5% between April and May to a seasonally adjusted 1.28 million units. Year-to-date, “single-family starts are up 18.8%, albeit off weak early 2023 data,” NAHB noted. “The multifamily sector, which includes apartment buildings and condos, declined 6.6% to an annualized 295,000 pace. This is the lowest pace for apartment construction since April 2020.”

“First, it’s important to realize that homebuilding has been in a slump for a while now, really ever since the Fed started hiking interest rates in the first quarter of 2022,” Anderson wrote. “Given the housing starts plunge for May reported earlier this week, we now expect total housing starts to contract in the second quarter by 6.3%—this is on top of a steep 5.0% decline in Q1. In fact, housing starts have contracted now in seven of the past nine quarters.”

The biggest decline, Anderson said, was in multifamily property starts with at least five units. That was down 51.7% year over year in May. Single-family starts were down 1.7% year over year. Building permits were down 9.5% from the same period last year.

Another drag on the economy could be consumer spending. “After back-to-back quarters with annualized growth topping 3% to end last year, real consumer spending slowed to 2.0% in Q1,” wrote BMO Deputy Chief Economist Michael Gregory. “This week’s weaker-than-expected retail sales results for May, and the downward revisions to April, suggest Q2 could be at least a little slower still.”

Current inflation rates and interest rates have been consumer spending headwinds. That hasn’t had the same effect as might otherwise happened because consumers had savings from the pandemic. “Meanwhile, record high net worth along with slower but still-expanding real wages and salaries are helping steer spending well clear of contraction,” Gregory wrote.

But that hasn’t been enough. “Since immediately before the pandemic, consumer prices have risen a cumulative 17.7% according to the PCEPI (the CPI is up 20.8%),” Gregory said. “Meanwhile, disposable personal income has grown 25.3%, resulting in a 6.4% total rise in real income, which translates to a 1.5% annual rate.” But the excess savings that had built up were gone by the end of 2023. “This suggests high inflation and interest rates could weigh more heavily until there’s further relief on both fronts. In the meantime, a hefty wealth effect along with still-decent gains in jobs and wages should keep real consumer spending well-propped in positive territory.”