They say housing drives the economy into and out of recession. Currently, the number of new housing starts is back to the level of the 2020 COVID-19 recession. Interestingly, employment for workers in residential construction – typically one of the first areas to see a decline before a recession – has not yet reached the has experienced the usual decline. Several factors keep the workforce stable, including clearing a backlog of orders and long lead times to complete projects.
Perhaps most importantly, some homebuilders have subsidized mortgage rates to maintain jobs and complete ongoing projects.
The key points of this report indicate that the Federal Reserve has overlooked the housing market for years. The existing home sales market does not match their dual mandate to ensure stable personal consumption expenditure (PCE) or consumer price index (CPI) prices, as these measures take rent into account. Instead, the existing home sales market is more about transferring commissions than causing significant job losses in the economy.
On the other hand, the sales and starts of new homes sector does have an impact on future housing production, which is crucial for tackling rent and house price inflation. This sector is closely tied to the overall economic cycle and tends to show patterns before every recession we have observed in recent modern history.
With the labor market cooling – especially in private non-farm payroll data – can this sector be completely ignored in 2025? We’ll find out soon. As 2024 draws to a close, the Fed has managed to overlook these issues for another year due to the factors mentioned above. However, these factors become increasingly uncertain as we approach 2025.
Let’s take a closer look at the data.
Housing construction is starting at recession levels, permits are getting a slight boost
By Census: Housing begins: Private housing starts in November reached a seasonally adjusted annualized rate of 1,289,000. This is 1.8 percent (±10.6 percent)* below the revised October estimate of 1,312,000 and 14.6 percent (±11.7 percent) below the November 2023 figure of 1,510,000.
Construction permits: Private homes granted planning permission in November reached a seasonally adjusted annual figure of 1,505,000. This is 6.1 percent above the revised figure of 1,419,000 in October, but 0.2 percent below the figure of 1,508,000 in November 2023
Last month I discussed the challenges of building millions of additional homes in the near future due to restrictive housing policies, as evidenced by recent data. However, despite these challenges, we have not lost our labor pool of construction workers. It is important to note that remodeling workers make up a significant portion of the residential construction workforce.
With short-term interest rates falling, some lending options are improving, such as land purchases and apartment financing. However, the number of new homes has been declining for some time, as shown in the graph below. If mortgage rates had not fallen from 7.5% to around 6% earlier this year, we would have suffered even more job losses in the construction sector. Before this drop in rates, we saw one negative labor report, although single-family permits showed a slight increase in the most recent report.
As the total number of completed units for sale across America increases, builders will be more conscious of their production with higher mortgage rates. If mortgage rates go higher for some reason, we can see what this has done to the home starts data earlier this year and also the home construction data. This is why Sarah and I recently discussed this being the housing wild card of 2025.
In 2025 I want to monitor whether mortgage interest rates remain high or rise further. I’m particularly interested in how long it will take before builders start laying off workers if demand weakens due to higher rates. At this point in the economic cycle, there is a risk of a recession in 2025 as new home sales data weaken. This concern arises because the data on home completions exceeds the number of home starts and permits.
We have already seen the negative impact of a 7.5% mortgage rate on this sector in 2024, so it will be crucial to keep track of all the economic data, with an emphasis on the housing sector as this is a crucial one for the Fed factor could be to prevent a recession. Since the Fed is meeting today, I hope a reporter asks them this question, since Chairman Powell noted at the last meeting that the housing market was weak.
