ATLANTA — The U.S. is in a recession that will temper homebuilding throughout the next year, one of the nation’s top economists said.
The National Association of Home Builders expects a 14% year-over-year decline in U.S. home starts for 2022, the first such decline in homebuilding since 2011. In the third quarter, Dallas-Fort Worth saw the largest year-over-year decline in home construction starts in almost a decade, according to Dallas-based housing analyst Residential Strategies.
“What I think is beyond denial right now, beyond debate, is the fact that the housing sector itself is in recession,” Robert Dietz, chief economist of the National Association of Home Builders, said in a presentation Tuesday at the annual National Association of Real Estate Editors conference in Atlanta. He said declines in single-family builder sentiment, single-family starts, permits and sales are all indicators of that.
Dietz said that in the short term, available housing inventory will rise due to higher construction costs and home prices that have challenged affordability. He also said the country’s massive undersupply of homes will remain an issue over the course of the next decade. “It’s distinguishing between that short run and long run that I think is going to be key to telling stories in the housing space and building space over the next year or two,” Dietz said.
Dietz said the Federal Reserve’s rapid increase in interest rates this year has been the most aggressive in decades, two to three times more rapid than in any other cycle. He expects the Fed to continue to raise rates until sometime in 2023, and that rates will not decline until 2024. He said housing will rebound by 2024, before the rest of the economy, as the interest rate hikes stop.
Expecting the U.S.’s gross domestic product to decrease each quarter through at least the first half of next year, except for third-quarter 2022, Dietz said “the overall economy is in a recession right now” and that the National Bureau of Economic Research — known as the scorekeepers of recessions — will eventually look back and designate some portion of 2022 and 2023 as such.
Dietz said future Fed rate increases are already baked into mortgage rates, but that rates will continue to rise up to an average of 7% for a 30-year fixed-rate mortgage.
“That means that more buyers are going to be priced out of the market,” he said. “There’s going to be additional downward demand that’s going to affect home prices as we move forward.”
Because of the rising rates’ effect on affordability for buyers, more investors will buy single-family homes to rent out, Dietz said. Additionally, more than one in 10 single-family homes are being built for renters, while historically that made up about 3% of home construction, he said.
The one sector of the industry he expects to grow through the recession is remodeling, because people are in their homes more during the week while working remotely and because they likely have a much lower mortgage rate than the current average, essentially locking them into the home they already have.
Even through the decline in building, most of the nation’s single-family home construction is concentrated in the South. Houston saw the most single-family home permits in the first seven months of 2022 at just over 32,000, led by Dallas-Fort Worth with almost 30,000 permits, according to U.S. Census Bureau data.
“If you add Houston and Dallas together, they’re producing more single-family homes — just those two metros — than the entire state of California,” Dietz said. “That’s how difficult it is to build in California with regulatory costs, taxes, fees, zoning issues and the like.”
