The US housing market will soon make sense again

Most of this week’s Chart Room shows what you’d expect to see: a positive correlation between existing home sales and new home construction in the US. A healthy housing market usually means more building and more sales: an unhealthy one tends to spell bad news for both.

That maxim held true even under the strain of the 2008 collapse, but the return of higher interest rates has created a distorted market where new construction has rebounded while existing home sales remain depressed. Continued new construction is easy enough to explain: America is likely to build homes despite fluctuations in interest rates.

Many large homebuilding companies have said as much, committing to new-build plans and using incentive structures such as interest rate buydown (a financing technique where the buyer pays an upfront free to lower the initial rate on their mortgage), to help address affordability issues in a higher-for-longer rate environment. 

This comes after a decade of underbuilding relative to population growth and household formation in the US, which has resulted in an estimated deficit of 2.3 million homes today. The dream of owning a family home still reigns strong in America, fuelling a need for continued construction.

Demographics also bolster housing demand: the most populous age cohort in the country is the early thirties, which also tends to be when people buy their first home.  Yet building products stocks have taken a battering even as new construction has been strong, with many Americans locked into mortgages below 4 per cent and priced out by today’s 7 per cent-plus rates. 

It is here that lower rates could restore the balance between new construction and existing sales, by freeing homeowners currently locked into their existing deals. Even the prospect of loosening policy appears to be exciting prospective buyers; the share of people planning to move to a new address over the next 12 months has started edging higher, according to a recent Survey of Consumer Expectations.

Loosening monetary policy should therefore generate an improvement in property listings and home turnover, which would stimulate home renovation activity and hence demand for building products. 

As such, we see this point at which to look for building products companies poised to benefit from potential upturns in both existing renovation and new housing cycles.  Even if interest rates stay higher for longer, it’s possible that some households will resign themselves to higher mortgage payments and elect to move anyway.

The market has behaved strangely, but people will only withstand that strangeness for so long. It shouldn’t be long before the relationship between new construction and existing home sales returns to normal.