On Housing Market Stabilization

US GDP grew in 2022’s second half—despite a drag from residential real estate’s swoon. Now, though, the housing market appears to be stabilizing, perhaps even looking up. Housing isn’t generally a big swing factor for the economy. But we think investors should take note anyway, as this constitutes a big fear from last year becoming less likely to detract going forward. It seems like another sign of reality set to exceed expectations.

Through Q4 2022, residential investment has contracted seven straight quarters. The last three were down -17.8% annualized, -27.1% and -25.9%—big drops as mortgage rates soared.^[i] But because housing activity is such a small part of GDP—about 3%—it didn’t detract all that much.^[ii] It shaved off -0.9 percentage point (ppt), -1.4 ppts and -1.2 ppts, respectively, from headline GDP growth in those quarters. Consumer spending (71% of GDP) and business investment (15%) growth outweighed housing’s contributions, as they usually do.

Now housing activity is starting to pick up. With benchmark Treasury yields—and inflation—trending down, 30-year fixed mortgage rates have eased below 6.5% from above 7% in November.^[iii] This helped existing home sales spike 14.5% m/m in February, as the median price of houses sold declined -0.2% y/y, dipping negative for the first time in 11 years.^[iv] As Exhibit 1 shows, home sales are coming off a low base after slumping all last year, but that is true of most recoveries. The combination of lower prices and increasing sales should help unlock plenty of pent-up demand—which is why the complete housing collapse many fear always seemed unlikely to us.

Exhibit 1: New and Existing Home Sales Picking Up From Low Bases

Source: FactSet, as of 3/23/2023.

Keep in mind that existing home sales, while a bigger market than new home sales, contribute negligibly to GDP—mainly through brokerage commissions and such services, not the sale itself. New home sales and housing starts are a better reflection of residential investment feeding into GDP. New home sales rose 1.1% m/m in February after January’s 1.8% and December’s 6.9% and are also coming off a low base.^[v] Meanwhile, builders’ housing starts surged 9.8% m/m after five months of decline. Rising backlogs point to more new home sales to come.^[vi] With demand improving, it isn’t surprising builder sentiment rose for the third straight month in March.^[vii]

Many fear the economy is weakening. But last year’s big declines in housing, a particularly rate-sensitive industry, seem set to diminish—if not flip from headwind to modest tailwind. If new home sales continue increasing like they have in January and February, they will likely add to Q1 GDP. Home prices also substantially influence CPI, with shelter costs about a third of the weight. Although they hit CPI at a substantial lag, price weakness subtracts from inflation and likely exerts a downward pull for the foreseeable future.

Then too, like many, we are watching loan growth—and mortgages make up the majority of consumer lending. We aren’t sure how recent banking turmoil will affect mortgage lending in the weeks and months ahead, but to the degree housing demand holds firm, we expect loan growth to continue supporting it. In our view, the latest housing data suggest the economic outlook is stronger than pundits portray.